Week 2 Homework Problems

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LEARNING OBJECTIVE 1

Identify the forms of business organization and the uses of accounting information. 

Suppose you graduate with a business degree and decide you want to start your own business. But what kind of business? You enjoy working with people, especially teaching them new skills. You also spend most of your free time outdoors, kayaking, backpacking, skiing, rock climbing, and mountain biking. You think you might be successful in opening an outdoor guide service where you grew up, in the Sierra Nevada mountains.

FORMS OF BUSINESS ORGANIZATION Your next decision is to determine the organizational form of your business. You have three choices—sole proprietorship, partnership, or corporation.

SOLE PROPRIETORSHIP

You might choose the sole proprietorship form for your outdoor guide service. A business owned by one person is a sole proprietorship. It is simple to set up and gives you control over the business. Small owner-operated businesses such as barber shops, law of�ices, and auto repair shops are often sole proprietorships, as are farms and small retail stores.

PARTNERSHIP

Another possibility is for you to join forces with other individuals to form a partnership. A business owned by two or more persons associated as partners is a partnership. Partnerships often are formed because one individual does not have enough economic resources to initiate or expand the business. Sometimes partners bring unique skills or resources to the partnership. You and your partners should formalize your duties and contributions in a written partnership agreement. Retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certi�ied public accountants), often organize as partnerships.

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Alternative Terminology notes present synonymous terms that you may come across in practice.

CORPORATION

As a third alternative, you might organize as a corporation. A business organized as a separate legal entity owned by stockholders is a corporation. Investors in a corporation receive shares of stock to indicate their ownership claim. Buying stock in a corporation is often more attractive than investing in a partnership because shares of stock are easy to sell (transfer ownership). Selling a proprietorship or partnership interest is much more involved. Also, individuals can become stockholders by investing relatively small amounts of money. Therefore, it is easier for corporations to raise funds. Successful corporations often have thousands of stockholders, and their stock is traded on organized stock exchanges like the New York Stock Exchange. Many businesses start as sole proprietorships or partnerships and eventually incorporate.

Other factors to consider in deciding which organizational form to choose are taxes and legal liability. If you choose a sole proprietorship or partnership, you generally receive more favorable tax treatment than a corporation. However, proprietors and partners are personally liable for all debts and legal obligations of the business; corporate stockholders are not. In other words, corporate stockholders generally pay higher taxes but have no personal legal liability. We will discuss these issues in more depth in a later chapter.

Finally, while sole proprietorships, partnerships, and corporations represent the main types of business organizations, hybrid forms are now allowed in all states. These hybrid business forms combine the tax advantages of partnerships with the limited liability of corporations. Probably the most common among

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these hybrids types are limited liability companies (LLCs) and subchapter S corporations. These forms are discussed extensively in business law classes.

The combined number of proprietorships and partnerships in the United States is more than �ive times the number of corporations. However, the revenue produced by corporations is eight times greater. Most of the largest businesses in the United States—for example, Coca-Cola, ExxonMobil, General Motors, Citigroup, and Microsoft—are corporations. Because the majority of U.S. business is done by corporations, the emphasis in this textbook is on the corporate form of organization.

ALTERNATIVE TERMINOLOGY

Stockholders are sometimes called shareholders.

USERS AND USES OF FINANCIAL INFORMATION The purpose of �inancial information is to provide inputs for decision-making. Accounting is the information system that identi�ies, records, and communicates the economic events of an organization to interested users. Users of accounting information can be divided broadly into two groups: internal users and external users.

Internal Users

Internal users of accounting information are managers who plan, organize, and run a business. These include marketing managers, production supervisors, �inance directors, and company of�icers. In running a business, managers must answer many important questions, as shown in Illustration 1-1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01lo1#c01-�ig-0001) .

ILLUSTRATION 1-1 Questions that internal users ask

Accounting Across the Organization boxes show applications of accounting information in various business functions.

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To answer these and other questions, you need detailed information on a timely basis. For internal users, accounting provides internal reports, such as �inancial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. In addition, companies present summarized �inancial information in the form of �inancial statements.

 ACCOUNTING ACROSS THE ORGANIZATION 

Clif Bar & Company

Owning a Piece of the Bar

The original Clif Bar® energy bar was created in 1990 after six months of experimentation by Gary Erickson and his mother in her kitchen. Today, the company has almost 300 employees and is considered one of the leading Landor's Breakaway Brands®. One of Clif Bar & Company's proudest moments was the creation of an employee stock ownership plan (ESOP) in 2010. This plan gives its employees 20% ownership of the company. The ESOP also resulted in Clif Bar enacting an open-book management program, including the commitment to educate all employee-owners about its �inances. Armed with basic accounting knowledge, employees are more aware of the �inancial impact of their actions, which leads to better decisions.

What are the bene�its to the company and to the employees of making the �inancial statements available to all employees? (Go to WileyPLUS for this answer and additional questions.)

External Users

There are several types of external users of accounting information. Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. Creditors such as suppliers and bankers use accounting information to evaluate the risks of selling on credit or lending money. Some questions that investors and creditors may ask about a company are shown in Illustration 1-2 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01lo1#c01-�ig-0002) .

ILLUSTRATION 1-2 Questions that external users ask

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The information needs and questions of other external users vary considerably. Taxing authorities, such as the Internal Revenue Service, want to know whether the company complies with the tax laws. Customers are interested in whether a company like General Motors will continue to honor product warranties and otherwise support its product lines. Labor unions, such as the Major League Baseball Players Association, want to know whether the owners have the ability to pay increased wages and bene�its. Regulatory agencies, such as the Securities and Exchange Commission or the Federal Trade Commission, want to know whether the company is operating within prescribed rules. For example, Enron, Dynegy, Duke Energy, and other big energy-trading companies reported record pro�its at the same time as California was paying extremely high prices for energy and suffering from blackouts. This disparity caused regulators to investigate the energy traders to make sure that the pro�its were earned by legitimate and fair practices.

ACCOUNTING ACROSS THE ORGANIZATION

Spinning the Career Wheel

How will the study of accounting help you? A working knowledge of accounting is desirable for virtually every �ield of business. Some examples of how accounting is used in business careers include the following.

General management: Managers of Ford Motors, Massachusetts General Hospital, California State University– Fullerton, a McDonald's franchise, and a Trek bike shop all need to understand accounting data in order to make wise business decisions.

Marketing: Marketing specialists at Procter & Gamble must be sensitive to costs and bene�its, which accounting helps them quantify and understand. Making a sale is meaningless unless it is a pro�itable sale.

Finance: Do you want to be a banker for Citicorp, an investment analyst for Goldman Sachs, or a stock broker for Merrill Lynch? These �ields rely heavily on accounting knowledge to analyze �inancial statements. In fact, it is dif�icult to get a good job in a �inance function without two or three courses in accounting.

Real estate: Are you interested in being a real estate broker for Prudential Real Estate? Because a third party—the bank —is almost always involved in �inancing a real estate transaction, brokers must understand the numbers involved: Can the buyer afford to make the payments to the bank? Does the cash �low from an industrial property justify the purchase price? What are the tax bene�its of the purchase?

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How might accounting help you? (Go to WileyPLUS for this answer and additional questions.)

ETHICS IN FINANCIAL REPORTING People won't gamble in a casino if they think it is “rigged.” Similarly, people won't “play” the stock market if they think stock prices are rigged. At one time, the �inancial press was full of articles about �inancial scandals at Enron, WorldCom, HealthSouth, and AIG. As more scandals came to light, a mistrust of �inancial reporting in general seemed to be developing. One article in the Wall Street Journal noted that “repeated disclosures about questionable accounting practices have bruised investors' faith in the reliability of earnings reports, which in turn has sent stock prices tumbling.” Imagine trying to carry on a business or invest money if you could not depend on the �inancial statements to be honestly prepared. Information would have no credibility. There is no doubt that a sound, well-functioning economy depends on accurate and dependable �inancial reporting.

United States regulators and lawmakers were very concerned that the economy would suffer if investors lost con�idence in corporate accounting because of unethical �inancial reporting. Congress passed the Sarbanes-Oxley Act (SOX) to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals. As a result of SOX, top management must now certify the accuracy of �inancial information. In addition, penalties for fraudulent �inancial activity are much more severe. Also, SOX increased both the independence of the outside auditors who review the accuracy of corporate �inancial statements and the oversight role of boards of directors.

ETHICS NOTE

Circus-founder P.T. Barnum is alleged to have said, “Trust everyone, but cut the deck.” What Sarbanes-Oxley does is to provide measures that (like cutting the deck of playing cards) help ensure that fraud will not occur.

Ethics Notes help sensitize you to some of the ethical issues in accounting.

Effective �inancial reporting depends on sound ethical behavior. To sensitize you to ethical situations and to give you practice at solving ethical dilemmas, we address ethics in a number of ways in this textbook. (1) A number of the Feature Stories and other parts of the text discuss the central importance of ethical behavior to �inancial reporting. (2) Ethics Insight boxes and marginal Ethics Notes highlight ethics situations and issues in actual business settings. (3) Many of the People, Planet, and Pro�it Insight boxes focus on ethical issues that companies face in measuring and reporting social and environmental issues. (4) At the end of each chapter, an Ethics Case simulates a business situation and asks you to put yourself in the position of a decision-maker in that case.

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When analyzing these various ethics cases and your own ethical experiences, you should apply the three steps outlined in Illustration 1-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01lo1#c01-�ig-0003) .

ILLUSTRATION 1-3 Steps in analyzing ethics cases

 ETHICS INSIGHT 

Dewey & LeBoeuf LLP

I Felt the Pressure—Would You?

“I felt the pressure.” That's what some of the employees of the now- defunct law �irm of Dewey & LeBoeuf LLP indicated when they helped to overstate revenue and use accounting tricks to hide losses and cover up cash shortages. These employees worked for the former �inance director and former chief �inancial of�icer (CFO) of the �irm. Here are some of their comments:

“I was instructed by the CFO to create invoices, knowing they would not be sent to clients. When I created these invoices, I knew that it was inappropriate.”

“I intentionally gave the auditors incorrect information in the course of the audit.”

What happened here is that a small group of lower-level employees over a period of years carried out the instructions of their bosses. Their bosses, however, seemed to have no concern as evidenced by various e-mails with one another in which they referred to their �inancial manipulations as accounting tricks, cooking the books, and fake income.

Source: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the Alleged Fraud,” Wall Street Journal (March 28, 2014).

Why did these employees lie, and what do you believe should be their penalty for these lies? (Go to WileyPLUS for this answer and additional questions.)

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Insight boxes provide examples of business situations from various perspectives—ethics, investor, international, and corporate social responsibility. Guideline answers to the critical thinking questions are available in WileyPLUS and at www.wiley.com/college/weygandt (http://www.wiley.com/college/weygandt) . Additional questions are offered in WileyPLUS.

DO IT! 1

Business Organization Forms

DO IT! exercises prompt you to stop and review the key points you have just studied. The Action Plan offers you tips about how to approach the problem.

In choosing the organizational form for your outdoor guide service, you should consider the pros and cons of each. Identify each of the following organizational characteristics with the organizational form or forms with which it is associated.

1. Easier to raise funds.

2. Simple to establish.

3. No personal legal liability.

4. Tax advantages.

5. Easier to transfer ownership.

Action Plan ✓ Know which organizational form best matches the business

type, size, and preferences of the owner(s).

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SOLUTION

1. Easier to raise funds: Corporation.

2. Simple to establish: Sole proprietorship and partnership.

3. No personal legal liability: Corporation.

4. Tax advantages: Sole proprietorship and partnership.

5. Easier to transfer ownership: Corporation.

Related exercise material: BE1-1 and DO IT! 1-1.

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3

The Accounting Information System

 CHAPTER PREVIEW 

As indicated in the Feature Story, a reliable information system is a necessity for any company. The purpose of this chapter is to explain and illustrate the features of an accounting information system.

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Accidents Happen

How organized are you �inancially? Take a short quiz. Answer yes or no to each question:

Does your wallet contain so many cash machine receipts that you've been declared a walking �ire hazard?

Do you wait until your debit card is denied before checking the status of your funds?

Was Aaron Rodgers (the quarterback for the Green Bay Packers) playing high school football the last time you veri�ied the accuracy of your bank account?

If you think it is hard to keep track of the many transactions that make up your life, imagine how dif�icult it is for a big corporation to do so. Not only that, but now consider how important it is for a big company to have good accounting records, especially if it has control of your life savings. MF Global Holdings Ltd was such a company. As a large investment broker, it held billions of dollars of investments for clients. If you had your life savings invested at MF Global, you might be slightly displeased if you heard this from one of its representatives: “You know, I kind of remember an account for someone with a name like yours—now what did we do with that?”

Unfortunately, that is almost exactly what happened to MF Global's clients shortly before it �iled for bankruptcy. During the days immediately following the bankruptcy �iling, regulators and auditors struggled to piece things together. In the words of one regulator, “Their books are a disaster … we're trying to �igure out what numbers are real numbers.” One company that considered buying an interest in MF Global walked away from the deal because it “couldn't get a sense of what was on the balance sheet.” That company said the information that should have been instantly available instead took days to produce.

It now appears that MF Global did not properly segregate customer accounts from company accounts. And, because of its sloppy recordkeeping, customers were not protected when the company had �inancial troubles. Total customer losses were approximately $1 billion. As you can see, accounting matters!

Source: S. Patterson and A. Lucchetti, “Inside the Hunt for MF Global Cash,” Wall Street Journal Online (November 11, 2011).

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LEARNING OBJECTIVE 1

Analyze the effect of business transactions on the basic accounting equation. 

The accounting cycle graphic above illustrates the steps companies follow each period to record transactions and eventually prepare �inancial statements.

The system of collecting and processing transaction data and communicating �inancial information to decision-makers is known as the accounting information system. Factors that shape an accounting information system include the nature of the company's business, the types of transactions, the size of the company, the volume of data, and the information demands of management and others.

Most businesses use computerized accounting systems—sometimes referred to as electronic data processing (EDP) systems. These systems handle all the steps involved in the recording process, from initial data entry to preparation of the �inancial statements. In order to remain competitive, companies continually improve their accounting systems to provide accurate and timely data for decision-making. For example, in a recent annual report, Tootsie Roll stated, “We also invested in additional processing and data storage hardware during the year. We view information technology as a key strategic tool, and are committed to deploying leading edge technology in this area.” In addition, many companies have upgraded their accounting information systems in response to the requirements of Sarbanes-Oxley.

Accounting information systems rely on a process referred to as the accounting cycle. As you can see from the graphic above, the accounting cycle begins with the analysis of business transactions and ends with the preparation of a post-closing trial balance. We explain each of the steps in this chapter as well as in Chapter 4 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch04#ch04) .

In this chapter, in order to emphasize the underlying concepts and principles, we focus on a manual accounting system. The accounting concepts and principles do not change whether a system is computerized or manual.

ACCOUNTING TRANSACTIONS To use an accounting information system, you need to know which economic events to recognize (record). Not all events are recorded and reported in the �inancial statements. For example, suppose General Motors hired a new employee and purchased a new computer. Are these events entered in its accounting records?

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The �irst event would not be recorded, but the second event would. We call economic events that require recording in the �inancial statements accounting transactions.

An accounting transaction occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event. The purchase of a computer by General Motors, the payment of rent by Microsoft, and the sale of a multi-day guided trip by Sierra Corporation are examples of events that change a company's assets, liabilities, or stockholders' equity. Illustration 3-1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0001) summarizes the decision process companies use to decide whether or not to record economic events.

ILLUSTRATION 3-1 Transaction identi�ication process

ANALYZING TRANSACTIONS In Chapter 1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01#ch01) , you learned the basic accounting equation:

Assets=Liabilities+Stockholders' Equity

In this chapter, you will learn how to analyze transactions in terms of their effect on assets, liabilities, and stockholders' equity. Transaction analysis is the process of identifying the speci�ic effects of economic events on the accounting equation.

The accounting equation must always balance. Each transaction has a dual (double-sided) effect on the equation. For example, if an individual asset is increased, there must be a corresponding:

Decrease in another asset, or

Increase in a speci�ic liability, or

Increase in stockholders' equity.

Two or more items could be affected when an asset is increased. For example, if a company purchases a computer for $10,000 by paying $6,000 in cash and signing a note for $4,000, one asset (equipment) increases $10,000, another asset (cash) decreases $6,000, and a liability (notes payable) increases $4,000.

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The result is that the accounting equation remains in balance—assets increased by a net $4,000 and liabilities increased by $4,000, as shown below.

Chapter 1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01#ch01) presented the �inancial statements for Sierra Corporation for its �irst month. You should review those �inancial statements (on page 16) at this time. To illustrate how economic events affect the accounting equation, we will examine events affecting Sierra during its �irst month.

In order to analyze the transactions for Sierra, we will expand the basic accounting equation. This will allow us to better illustrate the impact of transactions on stockholders' equity. Recall from the balance sheets in Chapters 1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01#ch01) and 2 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch02#ch02) that stockholders' equity is comprised of two parts: common stock and retained earnings. Common stock is affected when the company issues new shares of stock in exchange for cash. Retained earnings is affected when the company recognizes revenue, incurs expenses, or pays dividends. Illustration 3-2 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0002) shows the expanded equation.

ILLUSTRATION 3-2 Expanded accounting equation

If you are tempted to skip ahead after you've read a few of the following transaction analyses, don't do it. Each has something unique to teach, something you'll need later. (We assure you that we've kept them to the minimum needed!)

DECISION TOOLS

The accounting equation is used to determine if an accounting transaction has occurred.

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EVENT (1). INVESTMENT OF CASH BY STOCKHOLDERS.

On October 1, cash of $10,000 is invested in the business by investors in exchange for $10,000 of common stock. This event is an accounting transaction that results in an increase in both assets and stockholders' equity.

The equation is in balance after the issuance of common stock. Keeping track of the source of each change in stockholders' equity is essential for later accounting activities. In particular, items recorded in the revenue and expense columns are used for the calculation of net income.

EVENT (2). NOTE ISSUED IN EXCHANGE FOR CASH.

On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. This transaction results in an equal increase in assets and liabilities. The speci�ic effect of this transaction and the cumulative effect of the �irst two transactions are as follows.

Total assets are now $15,000, and liabilities plus stockholders' equity also total $15,000.

EVENT (3). PURCHASE OF EQUIPMENT FOR CASH.

On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co. This transaction results in an equal increase and decrease in Sierra's assets.

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The total assets are now $15,000, and liabilities plus stockholders' equity also total $15,000.

EVENT (4). RECEIPT OF CASH IN ADVANCE FROM CUSTOMER.

On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. Sierra received cash, it does not record revenue until it has performed the work. In some industries, such as the magazine and airline industries, customers are expected to prepay. These companies have a liability to the customer until they deliver the magazines or provide the �light. When the company eventually provides the product or service, it records the revenue.

Since Sierra received cash prior to performance of the service, Sierra has a liability for the work due.

EVENT (5). SERVICES PERFORMED FOR CASH.

On October 3, Sierra received $10,000 in cash (an asset) from Copa Company for guide services performed for a corporate event. Guide service is the principal revenue-producing activity of Sierra. Revenue increases stockholders' equity. This transaction, then, increases both assets and stockholders' equity.

Often companies perform services “on account.” That is, they perform services for which they are paid at a later date. Revenue, however, is recorded when services are performed. Therefore, revenues would increase when services are performed, even though cash has not been received. Instead of receiving cash, the company receives a different type of asset, an account receivable. Accounts receivable represent the right to receive payment at a later date. Suppose that Sierra had performed these services on account rather than for cash. This event would be reported using the accounting equation as:

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Later, when Sierra collects the $10,000 from the customer, Accounts Receivable decreases by $10,000, and Cash increases by $10,000.

Note that in this case, revenues are not affected by the collection of cash. Instead Sierra records an exchange of one asset (Accounts Receivable) for a different asset (Cash).

EVENT (6). PAYMENT OF RENT.

On October 3, Sierra paid its of�ice rent for the month of October in cash, $900. This rent payment is a transaction that results in a decrease in an asset, cash.

Rent is a cost incurred by Sierra in its effort to generate revenues. It is treated as an expense because it pertains only to the current month. Expenses decrease stockholders' equity. Sierra records the rent payment by decreasing cash and increasing expenses to maintain the balance of the accounting equation.

EVENT (7). PURCHASE OF INSURANCE POLICY FOR CASH.

On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. Payments of expenses that will bene�it more than one accounting period are identi�ied as assets called prepaid expenses or prepayments.

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The balance in total assets did not change; one asset account decreased by the same amount that another increased.

EVENT (8). PURCHASE OF SUPPLIES ON ACCOUNT.

On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500. In this case, “on account” means that the company receives goods or services that it will pay for at a later date. This transaction increases both an asset (supplies) and a liability (accounts payable).

EVENT (9). HIRING OF NEW EMPLOYEES.

On October 9, Sierra hired four new employees to begin work on October 15. Each employee will receive a weekly salary of $500 for a �ive-day work week, payable every two weeks. Employees will receive their �irst paychecks on October 26. On the date Sierra hires the employees, there is no effect on the accounting equation because the assets, liabilities, and stockholders' equity of the company have not changed.

EVENT (10). PAYMENT OF DIVIDEND.

On October 20, Sierra paid a $500 cash dividend. Dividends are a reduction of stockholders' equity but not an expense. Dividends are not included in the calculation of net income. Instead, a dividend is a distribution of the company's assets to its stockholders.

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EVENT (11). PAYMENT OF CASH FOR EMPLOYEE SALARIES.

Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Salaries and Wages Expense is an expense that reduces stockholders' equity. In this transaction, both assets and stockholders' equity are reduced.

INVESTOR INSIGHT   Why Accuracy Matters

While most companies record transactions very carefully, the reality is that mistakes still happen. For example, bank regulators �ined Bank One Corporation (now JPMorgan Chase) $1.8 million because they felt that the unreliability of the bank's accounting system caused it to violate regulatory requirements.

Also, in recent years Fannie Mae, the government-chartered mortgage association, announced a series of large accounting errors. These announcements caused alarm among investors, regulators, and politicians because they feared that the errors might suggest larger, undetected problems. This was important because the home-mortgage market depends on Fannie Mae to buy hundreds of billions of dollars of mortgages each year from banks, thus enabling the banks to issue new mortgages.

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Finally, before a major overhaul of its accounting system, the �inancial records of Waste Management Company were in such disarray that of the company's 57,000 employees, 10,000 were receiving pay slips that were in error.

The Sarbanes-Oxley Act was created to minimize the occurrence of errors like these by increasing every employee's responsibility for accurate �inancial reporting.

In order for these companies to prepare and issue �inancial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? (Go to WileyPLUS for this answer and additional questions.)

SUMMARY OF TRANSACTIONS Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) summarizes the transactions of Sierra Corporation to show their cumulative effect on the basic accounting equation. It includes the transaction number in the �irst column on the left. The right-most column shows the speci�ic effect of any transaction that affects stockholders' equity. Remember that Event (9) did not result in a transaction, so no entry is included for that event. The illustration demonstrates three important points:

1. Each transaction is analyzed in terms of its effect on assets, liabilities, and stockholders' equity.

2. The two sides of the equation must always be equal.

3. The cause of each change in stockholders' equity must be indicated.

ILLUSTRATION 3-3 Summary of transactions

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DO IT! 1

Transaction Analysis

A tabular analysis of the transactions made by Roberta Mendez & Co., a certi�ied public accounting �irm, for the month of August is shown below. Each increase and decrease in stockholders' equity is explained.

Describe each transaction that occurred for the month.

Action Plan ✓ Analyze the tabular analysis to determine the nature and

effect of each transaction.

✓ Keep the accounting equation in balance.

✓ Remember that a change in an asset will require a change in another asset, a liability, or in stockholders' equity.

SOLUTION

1. The company issued shares of stock to stockholders for $25,000 cash.

2. The company purchased $7,000 of equipment on account.

3. The company received $8,000 of cash in exchange for services performed.

4. The company paid $850 for this month's rent.

Related exercise material: BE3-1, BE3-2, BE3-3, DO IT! 3-1, E3-1, E3-2, E3-3, and E3-4.

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LEARNING OBJECTIVE 2

Explain how accounts, debits, and credits are used to record business transactions. 

Rather than using a tabular summary like the one in Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) for Sierra Corporation, an accounting information system uses accounts. An account is an individual accounting record of increases and decreases in a speci�ic asset, liability, stockholders' equity, revenue, or expense item. For example, Sierra Corporation has separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a speci�ic account, we capitalize the name.)

In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side. Because the alignment of these parts of an account resembles the letter T, it is referred to as a T-account. The basic form of an account is shown in Illustration 3-4 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0004) .

ILLUSTRATION 3-4 Basic form of account

We use this form of account often throughout this textbook to explain basic accounting relationships.

DEBITS AND CREDITS The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.

When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits.

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Note the position of the debit side and credit side in Illustration 3-4 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0004) .

The procedure of recording debits and credits in an account is shown in Illustration 3-5 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0005) for the transactions affecting the Cash account of Sierra Corporation. The data are taken from the Cash column of the tabular summary in Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) .

ILLUSTRATION 3-5 Tabular summary and account form for Sierra Corporation's Cash account

Every positive item in the tabular summary represents a receipt of cash; every negative amount represents a payment of cash. Notice that in the account form, we record the increases in cash as debits and the decreases in cash as credits. For example, the $10,000 receipt of cash (in blue) is debited to Cash, and the −$5,000 payment of cash (in red) is credited to Cash.

Having increases on one side and decreases on the other reduces recording errors and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of $15,200, indicates that Sierra had $15,200 more increases than decreases in cash. That is, since it started with a balance of zero, it has $15,200 in its Cash account.

DEBIT AND CREDIT PROCEDURES Each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the double-entry accounting system.

Under the double-entry system, the two-sided effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions. The double-entry system also helps to ensure the accuracy of the recorded amounts and helps to detect errors such as those at MF Global as discussed in the Feature Story. If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must equal the sum of all the credits. The double-entry system for determining the equality of the accounting equation is much more ef�icient than the plus/minus procedure used earlier.

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INTERNATIONAL NOTE Rules for accounting for speci�ic events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide.

Dr./Cr. Procedures for Assets and Liabilities

In Illustration 3-5 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig- 0005) for Sierra Corporation, increases in Cash—an asset—are entered on the left side, and decreases in Cash are entered on the right side. We know that both sides of the basic equation (Assets=Liabilities+Stockholders' Equity) must be equal. It therefore follows that increases and decreases in liabilities have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities are entered on the right or credit side, and decreases in liabilities are entered on the left or debit side. The effects that debits and credits have on assets and liabilities are summarized in Illustration 3-6 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0006) .

ILLUSTRATION 3-6 Debit and credit effects–assets and liabilities

Asset accounts normally show debit balances. That is, debits to a speci�ic asset account should exceed credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. The normal balances may be diagrammed as in Illustration 3-7 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0007) .

ILLUSTRATION 3-7 Normal balances–assets and liabilities

Knowing which is the normal balance in an account may help when you are trying to identify errors. For example, a credit balance in an asset account, such as Land, or a debit balance in a liability account, such as Salaries and Wages Payable, usually indicates errors in recording. Occasionally, however, an abnormal

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balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance by spending more than it has in its account. In automated accounting systems, the computer is programmed to �lag violations of the normal balance and to print out error or exception reports. In manual systems, careful visual inspection of the accounts is required to detect normal balance problems.

▼ HELPFUL HINT

The normal balance is the side where increases in the account are recorded.

Dr./Cr. Procedures for Stockholders' Equity

In Chapter 1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01#ch01) , we indicated that stockholders' equity is comprised of two parts: common stock and retained earnings. In the transaction events earlier in this chapter, you saw that revenues, expenses, and the payment of dividends affect retained earnings. Therefore, the subdivisions of stockholders' equity are common stock, retained earnings, dividends, revenues, and expenses.

COMMON STOCK

Common stock is issued to investors in exchange for the stockholders' investment. The Common Stock account is increased by credits and decreased by debits. For example, when cash is invested in the business, Cash is debited and Common Stock is credited. The effects of debits and credits on the Common Stock account are shown in Illustration 3-8 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0008) .

ILLUSTRATION 3-8 Debit and credit effects–common stock

The normal balance in the Common Stock account may be diagrammed as in Illustration 3-9 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0009) .

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ILLUSTRATION 3-9 Normal balance–common stock

RETAINED EARNINGS

Retained earnings is net income that is retained in the business. It represents the portion of stockholders' equity that has been accumulated through the pro�itable operation of the company. Retained Earnings is increased by credits (for example, by net income) and decreased by debits (for example, by a net loss), as shown in Illustration 3-10 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0010) .

ILLUSTRATION 3-10 Debit and credit effects–retained earnings

The normal balance for the Retained Earnings account may be diagrammed as in Illustration 3-11 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0011) .

ILLUSTRATION 3-11 Normal balance–retained earnings

DIVIDENDS

A dividend is a distribution by a corporation to its stockholders. The most common form of distribution is a cash dividend. Dividends result in a reduction of the stockholders' claims on retained earnings. Because dividends reduce stockholders' equity, increases in the Dividends account are recorded with debits. As shown in Illustration 3-12 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0012) , the Dividends account normally has a debit balance.

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ILLUSTRATION 3-12 Normal balance–dividends

REVENUES AND EXPENSES

When a company recognizes revenues, stockholders' equity is increased. Revenue accounts are increased by credits and decreased by debits.

Expenses decrease stockholders' equity. Thus, expense accounts are increased by debits and decreased by credits. The effects of debits and credits on revenues and expenses are shown in Illustration 3-13 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0013) .

ILLUSTRATION 3-13 Debit and credit effects–revenues and expenses

Credits to revenue accounts should exceed debits; debits to expense accounts should exceed credits. Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. The normal balances may be diagrammed as in Illustration 3-14 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0014) .

ILLUSTRATION 3-14 Normal balances–revenues and expenses

INVESTOR INSIGHT  

Chicago Cubs

Keeping Score

The Chicago Cubs baseball team has these major revenue and expense accounts:

Revenues Expenses Admissions (ticket sales) Players' salaries

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Revenues Expenses

Concessions Administrative salaries Television and radio Travel Advertising Ballpark maintenance

Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? (Go to WileyPLUS for this answer and additional questions.)

STOCKHOLDERS' EQUITY RELATIONSHIPS Companies report the subdivisions of stockholders' equity in various places in the �inancial statements:

Common stock and retained earnings: in the stockholders' equity section of the balance sheet.

Dividends: on the retained earnings statement.

Revenues and expenses: on the income statement.

Dividends, revenues, and expenses are eventually transferred to retained earnings at the end of the period. As a result, a change in any one of these three items affects stockholders' equity. Illustration 3-15 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0015) shows the relationships of the accounts affecting stockholders' equity.

ILLUSTRATION 3-15 Stockholders' equity relationships

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SUMMARY OF DEBIT/CREDIT RULES Illustration 3-16 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo2#c03-�ig-0016) summarizes the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the double-entry system. No matter what the transaction, total debits must equal total credits in order to keep the accounting equation in balance.

ILLUSTRATION 3-16 Summary of debit/credit rules

DO IT! 2

Debits and Credits for Balance Sheet Accounts

Kate Browne, president of Hair It Is Inc., has just rented space in a shopping mall for the purpose of opening and operating a beauty salon. Long before opening day and before purchasing equipment, hiring assistants, and remodeling the space, Kate was strongly advised to set up a double-entry set of accounting records in which to record all of her business transactions.

Identify the balance sheet accounts that Hair It Is Inc. will likely need to record the transactions necessary to establish and open for business. Also, indicate whether the normal balance of each account is a debit or a credit.

Action Plan ✓ First identify asset accounts for each different type of asset

invested in the business.

✓ Then identify liability accounts for debts incurred by the business.

✓ Hair It Is Inc. needs only one stockholders' equity account, Common Stock, when it begins the business. The other

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stockholders' equity account, Retained Earnings, will be needed after the business is operating.

SOLUTION

Hair It Is Inc. would likely need the following accounts in which to record the transactions necessary to establish and ready the beauty salon for opening day: Cash (debit balance); Equipment (debit balance); Supplies (debit balance); Accounts Payable (credit balance); Notes Payable (credit balance), if the business borrows money; and Common Stock (credit balance).

Related exercise material: BE3-4, BE3-5, DO IT! 3-2, E3-6, E3-7, and E3-8.

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LEARNING OBJECTIVE 3

Indicate how a journal is used in the recording process. 

THE RECORDING PROCESS Although it is possible to enter transaction information directly into the accounts, few businesses do so. Practically every business uses these basic steps in the recording process (an integral part of the accounting cycle):

1. Analyze each transaction in terms of its effect on the accounts.

2. Enter the transaction information in a journal.

3. Transfer the journal information to the appropriate accounts in the ledger.

The actual sequence of events begins with the transaction. Evidence of the transaction comes in the form of a source document, such as a sales slip, a check, a bill, or a cash register document. This evidence is analyzed to determine the effect of the transaction on speci�ic accounts. The transaction is then entered in the journal. Finally, the journal entry is transferred to the designated accounts in the ledger. The sequence of events in the recording process is shown in Illustration 3-17 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo3#c03-�ig-0017) .

ILLUSTRATION 3-17 The recording process

THE JOURNAL Transactions are initially recorded in chronological order in a journal before they are transferred to the accounts. For each transaction, the journal shows the debit and credit effects on speci�ic accounts. (In a computerized system, journals are kept as �iles, and accounts are recorded in computer databases.)

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ETHICS NOTE

Business documents provide evidence that transactions actually occurred. International Outsourcing Services, LLC was accused of submitting fraudulent documents (store coupons) to companies such as Kraft Foods and PepsiCo for reimbursement of as much as $250 million. Use of proper business documents reduces the likelihood of fraudulent activity.

Companies may use various kinds of journals, but every company has at least the most basic form of journal, a general journal. The journal makes three signi�icant contributions to the recording process:

1. It discloses in one place the complete effect of a transaction.

2. It provides a chronological record of transactions.

3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

Entering transaction data in the journal is known as journalizing. To illustrate the technique of journalizing, let's look at the �irst three transactions of Sierra Corporation in equation form.

On October 1, Sierra issued common stock in exchange for $10,000 cash:

On October 1, Sierra borrowed $5,000 by signing a note:

On October 2, Sierra purchased equipment for $5,000:

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Sierra makes separate journal entries for each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction. These transactions are journalized in Illustration 3-18 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo3#c03-�ig-0018) .

ILLUSTRATION 3-18 Recording transactions in journal form

Note the following features of the journal entries.

1. The date of the transaction is entered in the Date column.

2. The account to be debited is entered �irst at the left. The account to be credited is then entered on the next line, indented under the line above. The indentation differentiates debits from credits and decreases the possibility of switching the debit and credit amounts.

3. The amounts for the debits are recorded in the Debit (left) column, and the amounts for the credits are recorded in the Credit (right) column.

4. A brief explanation of the transaction is given.

It is important to use correct and speci�ic account titles in journalizing. Erroneous account titles lead to incorrect �inancial statements. Some �lexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. For example, a company could use any of these account titles for recording the cost of delivery trucks: Equipment, Delivery Equipment, Delivery Trucks, or Trucks. Once the company chooses the speci�ic title to use, however, it should record under that account title all subsequent transactions involving the account.

 ACCOUNTING ACROSS THE ORGANIZATION 

Microsoft

Boosting Pro�its

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Microsoft originally designed the Xbox 360 to have 256 megabytes of memory. But the design department said that amount of memory wouldn't support the best special effects. The purchasing department said that adding more memory would cost $30—which was 10% of the estimated selling price of $300. The marketing department, however, “determined that adding the memory would let Microsoft reduce marketing costs and attract more game developers, boosting royalty revenue. It would also extend the life of the console, generating more sales.”

As a result of these changes, Xbox enjoyed great success. But, it does have competitors. Its newest video game console, Xbox One, is now in a battle with Sony's Playstation4 for market share. How to compete? First, Microsoft bundled the critically acclaimed Titanfall with its Xbox One. By including the game most Xbox One buyers were going to purchase anyway, Microsoft was making its console more attractive. In addition, retailers are also discounting the Xbox, which should get the momentum going for increased sales. What Microsoft is doing is making sure that Xbox One is the center of the home entertainment system in the long run.

Sources: Robert A. Guth, “New Xbox Aim for Microsoft: Pro�itability,” Wall Street Journal (May 24, 2005), p. C1; and David Thier, “Will Microsoft Give the Xbox One a $50 Price Cut? www.Forbes.com (March 26, 2014).

In what ways is this Microsoft division using accounting to assist in its effort to become more pro�itable? (Go to WileyPLUS for this answer and additional questions.)

DO IT! 3

Journal Entries

The following events occurred during the �irst month of business of Hair It Is Inc., Kate Browne's beauty salon:

1. Issued common stock to shareholders in exchange for $20,000 cash.

2. Purchased $4,800 of equipment on account (to be paid in 30 days).

3. Interviewed three people for the position of stylist.

Prepare the entries to record the transactions.

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Action Plan ✓ Make sure to provide a complete and accurate representation

of the transactions' effects on the assets, liabilities, and stockholders' equity of the business.

SOLUTION

The three activities are recorded as follows.

Related exercise material: BE3-6, BE3-9, DO IT! 3-3, E3-7, E3-9, E3-10, E3-11, and E3- 12.

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LEARNING OBJECTIVE 4

Explain how a ledger anda posting help in the recording process. 

THE LEDGER The entire group of accounts maintained by a company is referred to collectively as the ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, stockholders' equity, revenue, and expense accounts, as shown in Illustration 3-19 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig-0019) (page 120). Whenever we use the term ledger in this textbook without additional speci�ication, it will mean the general ledger.

ILLUSTRATION 3-19 The general ledger

CHART OF ACCOUNTS The number and type of accounts used differ for each company, depending on the size, complexity, and type of business. For example, the number of accounts depends on the amount of detail desired by management. The management of one company may want one single account for all types of utility expense. Another may keep separate expense accounts for each type of utility expenditure, such as gas, electricity, and water. A small corporation like Sierra Corporation will not have many accounts compared with a corporate giant like Ford Motor Company. Sierra may be able to manage and report its activities in 20 to 30 accounts, whereas Ford requires thousands of accounts to keep track of its worldwide activities.

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Most companies list the accounts in a chart of accounts. They may create new accounts as needed during the life of the business. Illustration 3-20 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig-0020) shows the chart of accounts for Sierra in the order that they are typically listed (assets, liabilities, stockholders' equity, revenues, and expenses). Accounts shown in red are used in this chapter; accounts shown in black are explained in later chapters.

ILLUSTRATION 3-20 Chart of accounts for Sierra Corporation

POSTING The procedure of transferring journal entry amounts to ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. Posting involves these steps:

1. In the ledger, enter in the appropriate columns of the debited account(s) the date and debit amount shown in the journal.

2. In the ledger, enter in the appropriate columns of the credited account(s) the date and credit amount shown in the journal.

 ETHICS INSIGHT 

Credit Suisse Group

Sometimes a company's investment securities suffer a permanent decline in value below their original cost. When this occurs, the company is supposed to reduce the recorded value of the securities on its balance sheet (“write them down” in common �inancial lingo) and record a loss. It appears, however, that during the �inancial crisis of 2008, employees at some �inancial institutions chose to look the other way as the value of their investments skidded.

A number of Wall Street traders that worked for the investment bank Credit Suisse Group were charged with intentionally overstating the value of securities that had suffered declines of approximately $2.85

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billion. One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities.

Source: S. Pulliam, J. Eaglesham, and M. Siconol�i, “U.S. Plans Changes on Bond Fraud,” Wall Street Journal Online (February 1, 2012).

What incentives might employees have had to overstate the value of these investment securities on the company's �inancial statements? (Go to WileyPLUS for this answer and additional questions.)

THE RECORDING PROCESS ILLUSTRATED Illustrations 3-21 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig- 0021) through 3-31 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig- 0031) on the following pages show the basic steps in the recording process using the October transactions of Sierra Corporation. Sierra's accounting period is a month. A basic analysis and a debit–credit analysis precede the journalizing and posting of each transaction. Study these transaction analyses carefully. The purpose of transaction analysis is �irst to identify the type of account involved and then to determine whether a debit or a credit to the account is required. You should always perform this type of analysis before preparing a journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as more complex journal entries to be described in later chapters.

ILLUSTRATION 3-21 Investment of cash by stockholders

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ILLUSTRATION 3-22 Issue of note payable

ILLUSTRATION 3-23 Purchase of equipment

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ILLUSTRATION 3-24 Receipt of cash in advance from customer

▼ HELPFUL HINT

Many liabilities have the word “payable” in their title. But, note that Unearned Service Revenue is considered a liability even though the word payable is not used.

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ILLUSTRATION 3-25 Services performed for cash

ILLUSTRATION 3-26 Payment of rent with cash

ILLUSTRATION 3-27 Purchase of insurance policy with cash

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ILLUSTRATION 3-28 Purchase of supplies on account

ILLUSTRATION 3-29 Hiring of new employees

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ILLUSTRATION 3-30 Payment of dividend

ILLUSTRATION 3-31 Payment of cash for employee salaries

SUMMARY ILLUSTRATION OF JOURNALIZING AND POSTING The journal for Sierra Corporation for the month of October is summarized in Illustration 3-32 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig-0032) . The ledger is shown in Illustration 3-33

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(http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig-0033) (on page 118) with all balances highlighted in red.

ILLUSTRATION 3-32 General journal for Sierra Corporation

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ILLUSTRATION 3-33 General ledger for Sierra Corporation

DO IT! 4

Posting

Selected transactions from the journal of Faital Inc. during its �irst month of operations are presented below. Post these transactions to T-accounts.

Action Plan ✓ Journalize transactions to keep track of �inancial activities

(receipts, payments, receivables, payables, etc.).

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✓ To make entries useful, classify and summarize them by posting the entries to speci�ic ledger accounts.

SOLUTION

Related exercise material: BE3-10, DO IT! 3-4, and E3-14.

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LEARNING OBJECTIVE 5

Prepare a trial balance. 

A trial balance lists accounts and their balances at a given time. A company usually prepares a trial balance at the end of an accounting period. The accounts are listed in the order in which they appear in the ledger. Debit balances are listed in the left column and credit balances in the right column. The totals of the two columns must be equal.

The trial balance proves the mathematical equality of debits and credits after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at MF Global discussed in the Feature Story. In addition, a trial balance is useful in the preparation of �inancial statements.

These are the procedures for preparing a trial balance:

1. List the account titles and their balances.

2. Total the debit column and total the credit column.

3. Verify the equality of the two columns.

Illustration 3-34 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo5#c03-�ig-0034) presents the trial balance prepared from the ledger of Sierra Corporation. Note that the total debits, $28,700, equal the total credits, $28,700.

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ILLUSTRATION 3-34 Sierra Corporation trial balance

DECISION TOOLS

A trial balance proves that debits equal credits.

▼ HELPFUL HINT

Note that the order of presentation in the trial balance is:

Assets

Liabilities

Stockholders' equity

Revenues

Expenses

LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance column totals agree. For example, the trial balance may balance even when any of the following occurs: (1) a transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction. In other words, as long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. Nevertheless, despite these limitations, the trial balance is a useful screen for �inding errors and is frequently used in practice.

ETHICS NOTE

An error is the result of an unintentional mistake. It is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical.

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KEEPING AN EYE ON CASH The Cash account shown below re�lects all of the in�lows and out�lows of cash that occurred during October for Sierra Corporation (see Illustrations 3-21 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig-0021) to 3-31 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo4#c03-�ig- 0031) ). We have also provided a description of each transaction that affected the Cash account.

1. Oct. 1 Issued stock for $10,000 cash.

2. Oct. 1 Issued note payable for $5,000 cash.

3. Oct. 2 Purchased equipment for $5,000 cash.

4. Oct. 2 Received $1,200 cash in advance from customer.

5. Oct. 3 Received $10,000 cash for services performed.

6. Oct. 3 Paid $900 cash for October rent.

7. Oct. 4 Paid $600 cash for one-year insurance policy.

8. Oct. 20 Paid $500 cash dividend to stockholders.

9. Oct. 26 Paid $4,000 cash salaries.

The Cash account and the related cash transactions indicate why cash changed during October. However, to make this information useful for analysis, it is summarized in a statement of cash �lows. The statement of cash �lows classi�ies each transaction as an operating activity, an investing activity, or a �inancing activity. A user of this statement can then determine the amount of net cash provided by operating activities, the amount of cash used for investing purposes, and the amount of cash provided by �inancing activities.

Operating activities are the types of activities the company performs to generate pro�its. Sierra is an outdoor guide business, so its operating activities involve providing guide

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services. Activities 4, 5, 6, 7, and 9 relate to cash received or spent to directly support its guide services.

Investing activities include the purchase or sale of long-lived assets used in operating the business, or the purchase or sale of investment securities (stocks and bonds of companies other than Sierra). Activity 3, the purchase of equipment, is an investing activity.

The primary types of �inancing activities are borrowing money, issuing shares of stock, and paying dividends. The �inancing activities of Sierra are Activities 1, 2, and 8.

DO IT! 5

Trial Balance

The following accounts come from the ledger of SnowGo Corporation at December 31, 2017.

Equipment $88,000 Common Stock $20,000 Dividends 8,000 Salaries and Wages Payable 2,000 Accounts Payable 22,000 Notes Payable (due in 3 months) 19,000 Salaries and Wages Expense 42,000 Utilities Expense 3,000 Accounts Receivable 4,000 Prepaid Insurance 6,000 Service Revenue 95,000 Cash 7,000

Prepare a trial balance in good form.

Action Plan ✓ Determine normal balances and list accounts in the order they

appear in the ledger.

✓ Accounts with debit balances appear in the left column, and those with credit balances in the right column.

✓ Total the debit and credit columns to prove equality.

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SOLUTION

Related exercise material: BE3-11, BE3-12, DO IT! 3-5, E3-13, E3-15, E3-16, E3-17, E3- 18, E3-19, E3-20, E3-21, and E3-22.

USING DECISION TOOLS—KANSAS FARMERS' VERTICALLY INTEGRATED COOPERATIVE, INC. The Kansas Farmers' Vertically Integrated Cooperative, Inc. (K-VIC) was formed by over 200 northeast Kansas farmers in the late 1980s. Its purpose is to process raw materials, primarily grain and meat products grown by K-VIC's members, into end-user food products and then to distribute the products nationally. Pro�its not needed for expansion or investment are returned to the members annually, on a pro rata basis, according to the fair value of the grain and meat products received from each farmer.

Assume that the following trial balance was prepared for K-VIC.

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Because the trial balance is not in balance, you have checked with various people responsible for entering accounting data and have discovered the following.

1. The purchase of 35 new trucks, costing $7 million and paid for with cash, was not recorded.

2. A data entry clerk accidentally deleted the account name for an account with a credit balance of $472 million, so the amount was added to the Mortgage Payable account in the trial balance.

3. December cash sales revenue of $75 million was credited to the Sales Revenue account, but the other half of the entry was not made.

4. $50 million of salaries expense were mistakenly charged to Maintenance and Repairs Expense.

INSTRUCTIONS

Answer these questions.

(a) Which mistake(s) have caused the trial balance to be out of balance?

(b) Should all of the items be corrected? Explain.

(c) What is the name of the account the data entry clerk deleted?

(d) Make the necessary corrections and prepare a correct trial balance with accounts listed in proper order.

(e) On your trial balance, write BAL beside the accounts that go on the balance sheet and INC beside those that go on the income statement.

SOLUTION (a) Only mistake #3 has caused the trial balance to be out of balance.

(b) All of the items should be corrected. The misclassi�ication error (mistake #4) on the salaries expense would not affect bottom-line net income, but it does affect the amounts reported in the two expense accounts.

(c) There is no Common Stock account, so that must be the account that was deleted by the data entry clerk.

(d) and (e)

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REVIEW AND PRACTICE

LEARNING OBJECTIVE REVIEW 1. Analyze the effect of business transactions on the basic accounting equation.

Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a speci�ic liability, or (c) increase in stockholders' equity.

2. Explain how accounts, debits, and credits are used to record business transactions.

An account is an individual accounting record of increases and decreases in speci�ic asset, liability, and stockholders' equity items.

The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.

3. Indicate how a journal is used in the recording process.

The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.

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The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.

4. Explain how a ledger and posting help in the recording process.

The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.

5. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing �inancial statements.

DECISION TOOLS REVIEW

GLOSSARY REVIEW Account An individual accounting record of increases and decreases in speci�ic asset,

liability, stockholders' equity, revenue, or expense items.

Accounting information system The system of collecting and processing transaction data and communicating �inancial information to decision-makers.

Accounting transactions Events that require recording in the �inancial statements because they affect assets, liabilities, or stockholders' equity.

Chart of accounts A list of a company's accounts.

Credit The right side of an account.

Debit The left side of an account.

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Double-entry system A system that records the two-sided effect of each transaction in appropriate accounts.

General journal The most basic form of journal.

General ledger A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts.

Journal An accounting record in which transactions are initially recorded in chronological order.

Journalizing The procedure of entering transaction data in the journal.

Ledger The group of accounts maintained by a company.

Posting The procedure of transferring journal entry amounts to the ledger accounts.

T-account The basic form of an account.

Trial balance A list of accounts and their balances at a given time.

PRACTICE MULTIPLE-CHOICE QUESTIONS (LO 1)

1. The effects on the basic accounting equation of performing services for cash are to:

(a) increase assets and decrease stockholders' equity.

(b) increase assets and increase stockholders' equity.

(c) increase assets and increase liabilities.

(d) increase liabilities and increase stockholders' equity.

(LO 1)

2. Genesis Company buys a $900 machine on credit. This transaction will affect the:

(a) income statement only.

(b) balance sheet only.

(c) income statement and retained earnings statement only.

(d) income statement, retained earnings statement, and balance sheet.

(LO 1)

3. Which of the following events is not recorded in the accounting records?

(a) Equipment is purchased on account.

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(b) An employee is terminated.

(c) A cash investment is made into the business.

(d) Company pays dividend to stockholders.

(LO 1)

4. During 2017, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore:

(a) increased $40,000.

(b) decreased $140,000.

(c) decreased $40,000.

(d) increased $140,000.

(LO 2)

5. Which statement about an account is true?

(a) In its simplest form, an account consists of two parts.

(b) An account is an individual accounting record of increases and decreases in speci�ic asset, liability, and stockholders' equity items.

(c) There are separate accounts for speci�ic assets and liabilities but only one account for stockholders' equity items.

(d) The left side of an account is the credit, or decrease, side.

(LO 2)

6. Debits:

(a) increase both assets and liabilities.

(b) decrease both assets and liabilities.

(c) increase assets and decrease liabilities.

(d) decrease assets and increase liabilities.

(LO 2)

7. A revenue account:

(a) is increased by debits.

(b) is decreased by credits.

(c) has a normal balance of a debit.

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(d) is increased by credits.

(LO 2)

8. Which accounts normally have debit balances?

(a) Assets, expenses, and revenues.

(b) Assets, expenses, and retained earnings.

(c) Assets, liabilities, and dividends.

(d) Assets, dividends, and expenses.

(LO 2)

9. Paying an account payable with cash affects the components of the accounting equation in the following way:

(a) Decreases stockholders' equity and decreases liabilities.

(b) Increases assets and decreases liabilities.

(c) Decreases assets and increases stockholders' equity.

(d) Decreases assets and decreases liabilities.

(LO 3)

10. Which is not part of the recording process?

(a) Analyzing transactions.

(b) Preparing an income statement.

(c) Entering transactions in a journal.

(d) Posting journal entries.

(LO 3)

11. Which of these statements about a journal is false?

(a) It contains only revenue and expense accounts.

(b) It provides a chronological record of transactions.

(c) It helps to locate errors because the debit and credit amounts for each entry can be readily compared.

(d) It discloses in one place the complete effect of a transaction.

(LO 4)

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12. A ledger:

(a) contains only asset and liability accounts.

(b) should show accounts in alphabetical order.

(c) is a collection of the entire group of accounts maintained by a company.

(d) provides a chronological record of transactions.

(LO 4)

13. Posting:

(a) normally occurs before journalizing.

(b) transfers ledger transaction data to the journal.

(c) is an optional step in the recording process.

(d) transfers journal entries to ledger accounts.

(LO 5)

14. A trial balance:

(a) is a list of accounts with their balances at a given time.

(b) proves that proper account titles were used.

(c) will not balance if a correct journal entry is posted twice.

(d) proves that all transactions have been recorded.

(LO 5)

15. A trial balance will not balance if:

(a) a correct journal entry is posted twice.

(b) the purchase of supplies on account is debited to Supplies and credited to Cash.

(c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100.

(d) a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.

SOLUTIONS

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1. (b) When services are performed for cash, assets are increased and stockholders' equity is increased. The other choices are therefore incorrect.

2. (b) When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected.

3. (b) Termination of an employee is not a recordable event in the accounting records. The other choices all represent events that are recorded.

4. (a) Since assets decreased by $50,000 and liabilities decreased by $90,000, stockholders' equity has to increase by $40,000 to keep the accounting equation balanced. The other choices are therefore incorrect.

5. (b) An account is an individual accounting record of increases and decreases in speci�ic asset, liability, and stockholders' equity items. The other choices are incorrect because (a) in its simplest form, an account consists of three parts: a title and debit and credit side; (c) there are speci�ic accounts for different types of stockholders' equity, such as Common Stock, Retained Earnings, and Dividends; and (d) the left side of an account is the debit side.

6. (c) Debits increase assets and decrease liabilities. The other choices are therefore incorrect.

7. (d) Revenues are increased by credits. Revenues have a normal credit balance. The other choices are therefore incorrect.

8. (d) Assets, dividends, and expenses have normal debit balances. The other choices are incorrect because (a) revenues have a normal credit balance, (b) retained earnings has a normal credit balance, and (c) liabilities have a normal credit balance.

9. (d) When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well. The other choices are therefore incorrect.

10. (b) Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process.

11. (a) A journal contains entries affecting all accounts, not just revenue and expense accounts. The other choices are true statements.

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12. (c) A ledger is a collection of the entire group of accounts maintained by a company. The other choices are therefore incorrect.

13. (d) Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs after journalizing, (b) transfers the information contained in journal entries to the ledger, and (c) is a required step in the recording process. If posting is not done, the ledger accounts will not re�lect changes in the accounts resulting from transactions.

14. (a) A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because (b) it does not con�irm that proper account titles were used; (c) if a journal entry is posted twice, the trial balance will still balance; and (d) a trial balance does not prove that all transactions have been recorded.

15. (c) The entry will cause the trial balance to be out of balance. The other choices are incorrect because although these entries are incorrect, they will still allow the trial balance to balance.

PRACTICE EXERCISES

Prepare a tabular presentation.

(LO 1)

1. Legal Services Inc. was incorporated on July 1, 2017. During the �irst month of operations, the following transactions occurred.

1. Stockholders invested $10,000 in cash in exchange for common stock of Legal Services Inc.

2. Paid $800 for July rent on of�ice space.

3. Purchased of�ice equipment on account $3,000.

4. Performed legal services for clients for cash $1,500.

5. Borrowed $700 cash from a bank on a note payable.

6. Performed legal services for client on account $2,000.

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7. Paid monthly expenses: salaries $500, utilities $300, and advertising $100.

INSTRUCTIONS

Prepare a tabular summary of the transactions.

Journalize transactions.

(LO 3)

2. Presented below is information related to Conan Real Estate Agency.

Oct. 1 Arnold Conan begins business as a real estate agent with a cash investment of $18,000 in exchange for common stock.

2 Hires an administrative assistant. 3 Purchases of�ice equipment for $1,700, on account. 6 Sells a house and lot for B. Clinton; bills B. Clinton $4,200 for realty services

performed. 27 Pays $900 on the balance related to the transaction of October 3. 30 Pays the administrative assistant $2,800 in salary for October.

INSTRUCTIONS

Journalize the transactions. (You may omit explanations.)

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PRACTICE PROBLEM

Journalize transactions, post, and prepare a trial balance.

(LO 3, 4, 5)

Bob Sample and other student investors opened Campus Carpet Cleaning, Inc. on September 1, 2017. During the �irst month of operations, the following transactions occurred.

Sept. 1 Stockholders invested $20,000 cash in the business. 2 Paid $1,000 cash for store rent for the month of September. 3 Purchased industrial carpet-cleaning equipment for $25,000, paying $10,000 in

cash and signing a $15,000 6-month, 12% note payable. 4 Paid $1,200 for 1-year accident insurance policy. 10 Received bill from the Daily News for advertising the opening of the cleaning

service, $200. 15 Performed services on account for $6,200. 20 Paid a $700 cash dividend to stockholders. 30 Received $5,000 from customers billed on September 15.

The chart of accounts for the company is the same as for Sierra Corporation except for the following additional account: Advertising Expense.

INSTRUCTIONS (a) Journalize the September transactions.

(b) Open ledger accounts and post the September transactions.

(c) Prepare a trial balance at September 30, 2017.

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WileyPLUS Brief Exercises, DO IT! Exercises, Exercises, Problems, and many additional resources are available for practice in WileyPLUS.

QUESTIONS 1. Describe the accounting information system.

2. Can a business enter into a transaction that affects only the left side of the basic accounting equation? If so, give an example.

3. Are the following events recorded in the accounting records? Explain your answer in each case. (a) A major stockholder of the company dies.

(b) Supplies are purchased on account.

(c) An employee is �ired.

(d) The company pays a cash dividend to its stockholders.

4. Indicate how each business transaction affects the basic accounting equation. (a) Paid cash for janitorial services.

(b) Purchased equipment for cash.

(c) Issued common stock to investors in exchange for cash.

(d) Paid an account payable in full.

5. Why is an account referred to as a T-account?

6. The terms debit and credit mean “increase” and “decrease,” respectively. Do you agree? Explain.

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7. Barry Barack, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Barry correct? Explain.

8. Misty Reno, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Misty correct? Discuss.

9. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the Common Stock account.

10. What is the normal balance for each of these accounts? (a) Accounts Receivable.

(b) Cash.

(c) Dividends.

(d) Accounts Payable.

(e) Service Revenue.

(f) Salaries and Wages Expense.

(g) Common Stock.

11. Indicate whether each account is an asset, a liability, or a stockholders' equity account, and whether it would have a normal debit or credit balance. (a) Accounts Receivable.

(b) Accounts Payable.

(c) Equipment.

(d) Dividends.

(e) Supplies.

12. For the following transactions, indicate the account debited and the account credited. (a) Supplies are purchased on account.

(b) Cash is received on signing a note payable.

(c) Employees are paid salaries in cash.

13. For each account listed here, indicate whether it generally will have debit entries only, credit entries only, or both debit and credit entries. (a) Cash.

(b) Accounts Receivable.

(c) Dividends.

(d) Accounts Payable.

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(e) Salaries and Wages Expense.

(f) Service Revenue.

14. What are the normal balances for the following accounts of Apple? (a) Accounts Receivable, (b) Accounts Payable, (c) Sales, and (d) Selling, General, and Administrative Expenses.

15. What are the basic steps in the recording process?

16. (a) When entering a transaction in the journal, should the debit or credit be written �irst?

(b) Which should be indented, the debit or the credit?

17. (a) Should accounting transaction debits and credits be recorded directly in the ledger accounts?

(b) What are the advantages of �irst recording transactions in the journal and then posting to the ledger?

18. Journalize these accounting transactions. (a) Stockholders invested $12,000 in the business in exchange for common stock.

(b) Insurance of $800 is paid for the year.

(c) Supplies of $1,800 are purchased on account.

(d) Cash of $7,500 is received for services rendered.

19. (a) What is a ledger?

(b) Why is a chart of accounts important?

20. What is a trial balance and what are its purposes?

21. Brad Tyler is confused about how accounting information �lows through the accounting system. He believes information �lows in this order: (a) Debits and credits are posted to the ledger.

(b) Accounting transaction occurs.

(c) Information is entered in the journal.

(d) Financial statements are prepared.

(e) Trial balance is prepared.

Indicate to Brad the proper �low of the information.

22. Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing. What would you tell them? (a) The bookkeeper debited Cash for $600 and credited Salaries and Wages Expense for $600 for

payment of wages.

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(b) Cash collected on account was debited to Cash for $800, and Service Revenue was credited for $80.

BRIEF EXERCISES

Determine effect of transactions on basic accounting equation.

(LO 1), C

BE3-1 Presented below are three economic events. On a sheet of paper, list the letters (a), (b), and (c) with columns for assets, liabilities, and stockholders' equity. In each column, indicate whether the event increased (+), decreased (−), or had no effect (NE) on assets, liabilities, and stockholders' equity.

(a) Purchased supplies on account.

(b) Received cash for performing a service.

(c) Expenses paid in cash.

Determine effect of transactions on basic accounting equation.

(LO 1), AP

BE3-2 During 2017, Manion Corp. entered into the following transactions.

1. Borrowed $60,000 by issuing bonds.

2. Paid $9,000 cash dividend to stockholders.

3. Received $13,000 cash from a previously billed customer for services performed.

4. Purchased supplies on account for $3,100.

Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders' Equity in the right-hand margin. For Retained Earnings, use separate columns for Revenues, Expenses, and Dividends if necessary. Use Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) (page 99) as a model.

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Determine effect of transactions on basic accounting equation.

(LO 1), AP

BE3-3 During 2017, Rostock Company entered into the following transactions.

1. Purchased equipment for $286,176 cash.

2. Issued common stock to investors for $137,590 cash.

3. Purchased inventory of $68,480 on account.

Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders' Equity in the right-hand margin. For Retained Earnings, use separate columns for Revenues, Expenses, and Dividends if necessary. Use Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) (page 99) as a model.

Indicate debit and credit effects.

(LO 2), K

BE3-4 For each of the following accounts, indicate the effect of a debit or a credit on the account and the normal balance.

(a) Accounts Payable.

(b) Advertising Expense.

(c) Service Revenue.

(d) Accounts Receivable.

(e) Retained Earnings.

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(f) Dividends.

Identify accounts to be debited and credited.

(LO 2), C

BE3-5 Transactions for Jayne Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction.

June 1 Issues common stock to investors in exchange for $5,000 cash. 2 Buys equipment on account for $1,100. 3 Pays $740 to landlord for June rent. 12 Sends Wil Wheaton a bill for $700 after completing welding work.

Journalize transactions.

(LO 3), AP

BE3-6 Use the data in BE3-5 and journalize the transactions. (You may omit explanations.)

Identify steps in the recording process.

(LO 3), C

BE3-7 Rae Mohlee, a fellow student, is unclear about the basic steps in the recording process. Identify and brie�ly explain the steps in the order in which they occur.

Indicate basic debit–credit analysis.

(LO 3), C

BE3-8 Tilton Corporation has the following transactions during August of the current year. Indicate (a) the basic analysis and (b) the debit–credit analysis illustrated on pages 111–116.

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Aug. 1 Issues shares of common stock to investors in exchange for $10,000. 4 Pays insurance in advance for 3 months, $1,500. 16 Receives $900 from clients for services rendered. 27 Pays the secretary $620 salary.

Journalize transactions.

(LO 3), AP

BE3-9 Use the data in BE3-8 and journalize the transactions. (You may omit explanations.)

Post journal entries to T-accounts.

(LO 4), AP

BE3-10 Selected transactions for Montes Company are presented below in journal form (without explanations). Post the transactions to T-accounts.

Prepare a trial balance.

(LO 5), AP

BE3-11 From the ledger balances below, prepare a trial balance for Peete Company at June 30, 2017. All account balances are normal.

Accounts Payable $ 1,000 Cash 5,400 Common Stock 18,000

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Dividends 1,200 Equipment 13,000 Service Revenue $8,600 Accounts Receivable 3,000 Salaries and Wages Expense 4,000 Rent Expense 1,000

Prepare a corrected trial balance.

(LO 5), AN

BE3-12 An inexperienced bookkeeper prepared the following trial balance that does not balance. Prepare a correct trial balance, assuming all account balances are normal.

DO IT! EXERCISES

Prepare tabular analysis.

(LO 1), AP

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DO IT! 3-1 Transactions made by Mickelson Co. for the month of March are shown below. Prepare a tabular analysis that shows the effects of these transactions on the expanded accounting equation, similar to that shown in Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) (page 99).

1. The company performed $20,000 of services for customers on account.

2. The company received $20,000 in cash from customers who had been billed for services [in transaction (1)].

3. The company received a bill for $1,800 of advertising but will not pay it until a later date.

4. Mickelson Co. paid a cash dividend of $3,000.

Identify normal balances.

(LO 2), C

DO IT! 3-2 Boyd Docker has just rented space in a strip mall. In this space, he will open a photography studio, to be called SnapShot! A friend has advised Boyd to set up a double- entry set of accounting records in which to record all of his business transactions.

Identify the balance sheet accounts that Boyd will likely need to record the transactions needed to open his business (a corporation). Indicate whether the normal balance of each account is a debit or credit.

Record business activities.

(LO 3), AP

DO IT! 3-3 Boyd Docker engaged in the following activities in establishing his photography studio, SnapShot!:

1. Opened a bank account in the name of SnapShot! and deposited $8,000 of his own money into this account in exchange for common stock.

2. Purchased photography supplies at a total cost of $950. The business paid $400 in cash, and the balance is on account.

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3. Obtained estimates on the cost of photography equipment from three different manufacturers.

Prepare the journal entries to record the transactions.

Post transactions.

(LO 4), AP

DO IT! 3-4 Boyd Docker recorded the following transactions during the month of April.

Apr. 3 Cash 3,400 Service Revenue 3,400 16 Rent Expense 500 Cash 500 20 Salaries and Wages Expense 300 Cash 300

Post these entries to the Cash account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,900.

Prepare a trial balance.

(LO 5), AP

DO IT! 3-5 The following accounts are taken from the ledger of Chillin' Company at December 31, 2017.

Notes Payable $20,000 Cash $6,000 Common Stock 25,000 Supplies 5,000 Equipment 76,000 Rent Expense 2,000 Dividends 8,000 Salaries and Wages Payable 3,000 Salaries and Wages Expense 38,000 Accounts Payable 9,000 Service Revenue 86,000 Accounts Receivable 8,000

Prepare a trial balance in good form.

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EXERCISES

Analyze the effect of transactions.

(LO 1), C

E3-1 Selected transactions for Thyme Advertising Company, Inc. are listed here.

1. Issued common stock to investors in exchange for cash received from investors.

2. Paid monthly rent.

3. Received cash from customers when service was performed.

4. Billed customers for services performed.

5. Paid dividend to stockholders.

6. Incurred advertising expense on account.

7. Received cash from customers billed in (4).

8. Purchased additional equipment for cash.

9. Purchased equipment on account.

Instructions

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. For example, the �irst answer is (1) Increase in assets and increase in stockholders' equity.

Analyze the effect of transactions on assets, liabilities, and stockholders' equity.

(LO 1), AP

E3-2 Brady Company entered into these transactions during May 2017, its �irst month of operations.

1. Stockholders invested $40,000 in the business in exchange for common stock of the company.

2. Purchased computers for of�ice use for $30,000 from Ladd on account.

3. Paid $4,000 cash for May rent on storage space.

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4. Performed computer services worth $19,000 on account.

5. Performed computer services for Wharton Construction Company for $5,000 cash.

6. Paid Western States Power Co. $8,000 cash for energy usage in May.

7. Paid Ladd for the computers purchased in (2).

8. Incurred advertising expense for May of $1,300 on account.

9. Received $12,000 cash from customers for contracts billed in (4).

Instructions

Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders' Equity in the right-hand margin. Use Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) (page 99) as a model.

Determine effect of transactions on basic accounting equation.

(LO 1), AP

E3-3 During 2017, its �irst year of operations as a delivery service, Persimmon Corp. entered into the following transactions.

1. Issued shares of common stock to investors in exchange for $100,000 in cash.

2. Borrowed $45,000 by issuing bonds.

3. Purchased delivery trucks for $60,000 cash.

4. Received $16,000 from customers for services performed.

5. Purchased supplies for $4,700 on account.

6. Paid rent of $5,200.

7. Performed services on account for $10,000.

8. Paid salaries of $28,000.

9. Paid a dividend of $11,000 to shareholders.

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Instructions

Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders' Equity in the right-hand margin. Use Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) (page 99) as a model.

Analyze transactions and compute net income.

(LO 1), AP

E3-4 A tabular analysis of the transactions made during August 2017 by Wolfe Company during its �irst month of operations is shown below. Each increase and decrease in stockholders' equity is explained.

Instructions (a) Describe each transaction.

(b) Determine how much stockholders' equity increased for the month.

(c) Compute the net income for the month.

Prepare an income statement, retained earnings statement, and balance sheet.

(LO 2), AP

E3-5 The tabular analysis of transactions for Wolfe Company is presented in E3-4.

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Instructions

Prepare an income statement and a retained earnings statement for August and a classi�ied balance sheet at August 31, 2017.

Identify normal account balance and corresponding �inancial statement.

(LO 2), K

E3-6 The following accounts, in alphabetical order, were selected from recent �inancial statements of Krispy Kreme Doughnuts, Inc.

Accounts Payable Interest Income Accounts Receivable Inventories Common Stock Prepaid Expenses Depreciation Expense Property and Equipment Interest Expense Revenues

Instructions

For each account, indicate (a) whether the normal balance is a debit or a credit, and (b) the �inancial statement—balance sheet or income statement—where the account should be presented.

Identify debits, credits, and normal balances and journalize transactions.

(LO 2, 3), AP

E3-7 Selected transactions for Front Room, an interior decorator corporation, in its �irst month of business, are as follows.

1. Issued stock to investors for $15,000 in cash.

2. Purchased used car for $10,000 cash for use in business.

3. Purchased supplies on account for $300.

4. Billed customers $3,700 for services performed.

5. Paid $200 cash for advertising at the start of the business.

6. Received $1,100 cash from customers billed in transaction (4).

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7. Paid creditor $300 cash on account.

8. Paid dividends of $400 cash to stockholders.

Instructions (a) For each transaction indicate (a) the basic type of account debited and credited (asset, liability,

stockholders' equity); (b) the speci�ic account debited and credited (Cash, Rent Expense, Service Revenue, etc.); (c) whether the speci�ic account is increased or decreased; and (d) the normal balance of the speci�ic account. Use the following format, in which transaction (1) is given as an example.

(b) Journalize the transactions. Do not provide explanations.

Analyze transactions and determine their effect on accounts.

(LO 2), C

E3-8 This information relates to McCall Real Estate Agency.

Oct. 1 Stockholders invest $30,000 in exchange for common stock of the corporation. 2 Hires an administrative assistant at an annual salary of $36,000. 3 Buys of�ice furniture for $3,800, on account. 6 Sells a house and lot for E.C. Roads; commissions due from Roads, $10,800 (not paid by Roads at

this time). 10 Receives cash of $140 as commission for acting as rental agent renting an apartment. 27 Pays $700 on account for the of�ice furniture purchased on October 3. 30 Pays the administrative assistant $3,000 in salary for October.

Instructions

Prepare the debit–credit analysis for each transaction, as illustrated on pages 111–116.

Journalize transactions.

(LO 3), AP

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E3-9 Transaction data for McCall Real Estate Agency are presented in E3-8.

Instructions

Journalize the transactions. Do not provide explanations.

Journalize a series of transactions.

(LO 3), AP

E3-10 The May transactions of Chulak Corporation were as follows.

May 4 Paid $700 due for supplies previously purchased on account. 7 Performed advisory services on account for $6,800. 8 Purchased supplies for $850 on account. 9 Purchased equipment for $1,000 in cash. 17 Paid employees $530 in cash. 22 Received bill for equipment repairs of $900. 29 Paid $1,200 for 12 months of insurance policy. Coverage begins June 1.

Instructions

Journalize the transactions. Do not provide explanations.

Journalize a series of transactions.

(LO 3), AP

E3-11 Selected transactions for Sophie's Dog Care are as follows during the month of March.

March 1 Paid monthly rent of $1,200. 3 Performed services for $140 on account. 5 Performed services for cash of $75. 8 Purchased equipment for $600. The company paid cash of $80 and the balance was on

account. 12 Received cash from customers billed on March 3. 14 Paid wages to employees of $525.

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22 Paid utilities of $72. 24 Borrowed $1,500 from Grafton State Bank by signing a note. 27 Paid $220 to repair service for plumbing repairs. 28 Paid balance amount owed from equipment purchase on March 8. 30 Paid $1,800 for six months of insurance.

Instructions

Journalize the transactions. Do not provide explanations.

Record journal entries.

(LO 3), AP

E3-12 On April 1, Adventures Travel Agency, Inc. began operations. The following transactions were completed during the month.

1. Issued common stock for $24,000 cash.

2. Obtained a bank loan for $7,000 by issuing a note payable.

3. Paid $11,000 cash to buy equipment.

4. Paid $1,200 cash for April of�ice rent.

5. Paid $1,450 for supplies.

6. Purchased $600 of advertising in the Daily Herald, on account.

7. Performed services for $18,000: cash of $2,000 was received from customers, and the balance of $16,000 was billed to customers on account.

8. Paid $400 cash dividend to stockholders.

9. Paid the utility bill for the month, $2,000.

10. Paid Daily Herald the amount due in transaction (6).

11. Paid $40 of interest on the bank loan obtained in transaction (2).

12. Paid employees' salaries, $6,400.

13. Received $12,000 cash from customers billed in transaction (7).

14. Paid income tax, $1,500.

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Instructions

Journalize the transactions. Do not provide explanations.

Post journal entries and prepare a trial balance.

(LO 4, 5), AP

E3-13 Transaction data and journal entries for McCall Real Estate Agency are presented in E3-8 and E3-9.

Instructions (a) Post the transactions to T-accounts.

(b) Prepare a trial balance at October 31, 2017.

Analyze transactions, prepare journal entries, and post transactions to T- accounts.

(LO 1, 3, 4), AP

E3-14 Selected transactions for Therow Corporation during its �irst month in business are presented below.

Sept. 1 Issued common stock in exchange for $20,000 cash received from investors. 5 Purchased equipment for $9,000, paying $3,000 in cash and the balance on account. 8 Performed services on account for $18,000. 14 Paid salaries of $1,200. 25 Paid $4,000 cash on balance owed for equipment. 30 Paid $500 cash dividend.

Therow's chart of accounts shows Cash, Accounts Receivable, Equipment, Accounts Payable, Common Stock, Dividends, Service Revenue, and Salaries and Wages Expense.

Instructions (a) Prepare a tabular analysis of the September transactions. The column headings should be

Cash+Accounts Receivable+Equipment=Accounts Payable+Common Stock+Revenues−Expenses−Dividends. For transactions affecting stockholders' equity, provide explanations in the right margin, as shown on Illustration 3-3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03lo1#c03-�ig-0003) on page 99.

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(b) Journalize the transactions. Do not provide explanations.

(c) Post the transactions to T-accounts.

Journalize transactions from T-accounts and prepare a trial balance.

(LO 3, 5), AN

E3-15 The T-accounts below summarize the ledger of Salvador's Gardening Company, Inc. at the end of the �irst month of operations.

Instructions (a) Prepare the journal entries (including explanations) that resulted in the amounts posted to the

accounts. Present them in the order they occurred.

(b) Prepare a trial balance at April 30, 2017. (Hint: Compute ending balances of T-accounts �irst.)

Post journal entries and prepare a trial balance.

(LO 4, 5), AP

E3-16 Selected transactions from the journal of Baylee Inc. during its �irst month of operations are presented here.

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Instructions (a) Post the transactions to T-accounts.

(b) Prepare a trial balance at August 31, 2017.

Journalize transactions from T-accounts and prepare a trial balance.

(LO 3, 5), AN

E3-17 Here is the ledger for Kriscoe Co.

Instructions (a) Reproduce the journal entries for only the transactions that occurred on October 1, 10, and 20, and

provide explanations for each.

(b) Prepare a trial balance at October 31, 2017. (Hint: Compute ending balances of T-accounts �irst.)

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Journalize transactions, post transactions to T-accounts, and prepare trial balance.

(LO 3, 4, 5), AP

E3-18 Beyers Corporation provides security services. Selected transactions for Beyers are presented below.

Oct. 1 Issued common stock in exchange for $66,000 cash from investors. 2 Hired part-time security consultant. Salary will be $2,000 per month. First day of work will be

October 15. 4 Paid 1 month of rent for building for $2,000. 7 Purchased equipment for $18,000, paying $4,000 cash and the balance on account. 8 Paid $500 for advertising. 10 Received bill for equipment repair cost of $390. 12 Provided security services for event for $3,200 on account. 16 Purchased supplies for $410 on account. 21 Paid balance due from October 7 purchase of equipment. 24 Received and paid utility bill for $148. 27 Received payment from customer for October 12 services performed. 31 Paid employee salaries and wages of $5,100.

Instructions (a) Journalize the transactions. Do not provide explanations.

(b) Post the transactions to T-accounts.

(c) Prepare a trial balance at October 31, 2017. (Hint: Compute ending balances of T-accounts �irst.)

Analyze errors and their effects on trial balance.

(LO 5), AN

E3-19 The bookkeeper for Birmingham Corporation made these errors in journalizing and posting.

1. A credit posting of $400 to Accounts Receivable was omitted.

2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.

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3. A collection on account of $100 was journalized and posted as a debit to Cash $100 and a credit to Accounts Payable $100.

4. A credit posting of $300 to Income Taxes Payable was made twice.

5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25.

6. A debit of $395 to Advertising Expense was posted as $359.

Instructions

For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example.

Prepare a trial balance and �inancial statements.

(LO 5), AP

E3-20 The accounts in the ledger of Rapid Delivery Service contain the following balances on July 31, 2017.

Accounts Receivable $13,400 Accounts Payable 8,400 Cash ? Equipment 59,360 Maintenance and Repairs Expense 1,958 Insurance Expense 900 Notes Payable (due 2020) 28,450 Prepaid Insurance $ 2,200 Service Revenue 15,500 Dividends 700 Common Stock 40,000 Salaries and Wages Expense 7,428 Salaries and Wages Payable 820 Retained Earnings (July 1, 2017) 5,200

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Instructions (a) Prepare a trial balance with the accounts arranged as illustrated in the chapter, and �ill in the missing

amount for Cash.

(b) Prepare an income statement, a retained earnings statement, and a classi�ied balance sheet for the month of July 2017.

Classify transactions as cash-�low activities.

(LO 5), AP

E3-21 Review the transactions listed in E3-1 for Thyme Advertising Company. Classify each transaction as either an operating activity, investing activity, or �inancing activity, or if no cash is exchanged, as a noncash event.

Classify transactions as cash-�low activities.

(LO 5), AP

E3-22 Review the transactions listed in E3-3 for Persimmon Corp. Classify each transaction as either an operating activity, investing activity, or �inancing activity, or if no cash is exchanged, as a noncash event.

EXERCISES: SET B AND CHALLENGE EXERCISES Visit the book's companion website, at www.wiley.com/college/kimmel (http://www.wiley.com/college/kimmel) , and choose the Student Companion site to access Exercises: Set B and Challenge Exercises.

PROBLEMS: SET A

Analyze transactions and compute net income.

(LO 1), AP

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P3-1A On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month.

1. Stockholders invested $30,000 cash in the company in exchange for common stock.

2. Paid $900 cash for April of�ice rent.

3. Purchased of�ice equipment for $3,400 cash.

4. Purchased $200 of advertising in the Chicago Tribune, on account.

5. Paid $500 cash for of�ice supplies.

6. Performed services worth $12,000. Cash of $3,000 is received from customers, and the balance of $9,000 is billed to customers on account.

7. Paid $400 cash dividend.

8. Paid Chicago Tribune amount due in transaction (4).

9. Paid employees' salaries $1,800.

10. Received $9,000 in cash from customers billed previously in transaction (6).

Instructions

Cash $34,800 Total assets $38,700

(a) Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, and Retained Earnings (with separate columns for Revenues, Expenses, and Dividends). Include margin explanations for any changes in Retained Earnings.

(b) From an analysis of the Retained Earnings columns, compute the net income or net loss for April.

Analyze transactions and prepare �inancial statements.

(LO 1, 2), AP

P3-2A Nona Curry started her own consulting �irm, Curry Consulting Inc., on May 1, 2017. The following transactions occurred during the month of May.

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May 1 Stockholders invested $15,000 cash in the business in exchange for common stock. 2 Paid $600 for of�ice rent for the month. 3 Purchased $500 of supplies on account. 5 Paid $150 to advertise in the County News. 9 Received $1,400 cash for services performed. 12 Paid $200 cash dividend. 15 Performed $4,200 of services on account. 17 Paid $2,500 for employee salaries. 20 Paid for the supplies purchased on account on May 3. 23 Received a cash payment of $1,200 for services performed on account on May 15. 26 Borrowed $5,000 from the bank on a note payable. 29 Purchased of�ice equipment for $2,000 paying $200 in cash and the balance on account. 30 Paid $180 for utilities.

Instructions (a) Show the effects of the previous transactions on the accounting equation using the following format.

Assume the note payable is to be repaid within the year.

Include margin explanations for any changes in Retained Earnings.

(a) Cash $18,270 Total assets $23,770 (b) Net income $2,170

(b) Prepare an income statement for the month of May 2017.

(c) Prepare a classi�ied balance sheet at May 31, 2017.

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Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet.

(LO 1, 2), AP

P3-3A Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2017. On July 31 the balance sheet showed Cash $4,000, Accounts Receivable $2,500, Supplies $500, Equipment $5,000, Accounts Payable $4,200, Common Stock $6,200, and Retained Earnings $1,600. During August, the following transactions occurred.

Aug. 1 Collected $1,100 of accounts receivable due from customers. 4 Paid $2,700 cash for accounts payable due. 9 Performed services worth $5,400, of which $3,600 is collected in cash and the balance is due in

September. 15 Purchased additional of�ice equipment for $4,000, paying $700 in cash and the balance on

account. 19 Paid salaries $1,400, rent for August $700, and advertising expenses $350. 23 Paid a cash dividend of $700. 26 Borrowed $5,000 from American Federal Bank; the money was borrowed on a 4-month note

payable. 31 Incurred utility expenses for the month on account $380.

Instructions

(a) Cash $7,150 (b) Net income $2,570 Ret. earnings $3,470

(a) Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column heading should be Cash+Accounts Receivable+Supplies+Equipment=Notes Payable+Accounts Payable+Common Stock+Retained Earnings+Revenues−Expenses−Dividends. Include margin explanations for any changes in Retained Earnings.

(b) Prepare an income statement for August, a retained earnings statement for August, and a classi�ied balance sheet at August 31.

Journalize a series of transactions.

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(LO 3), AP

P3-4A Bradley's Miniature Golf and Driving Range Inc. was opened on March 1 by Bob Dean. These selected events and transactions occurred during March.

Mar. 1 Stockholders invested $50,000 cash in the business in exchange for common stock of the corporation.

3 Purchased Snead's Golf Land for $38,000 cash. The price consists of land $23,000, building $9,000, and equipment $6,000. (Record this in a single entry.)

5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,200 cash.

6 Paid cash $2,400 for a 1-year insurance policy. 10 Purchased golf clubs and other equipment for $5,500 from Tahoe Company, payable in 30 days. 18 Received golf fees of $1,600 in cash from customers for golf services performed. 19 Sold 100 coupon books for $25 each in cash. Each book contains 10 coupons that enable the

holder to play one round of miniature golf or to hit one bucket of golf balls. (Hint: The revenue should not be recognized until the customers use the coupons.)

25 Paid a $500 cash dividend. 30 Paid salaries of $800. 30 Paid Tahoe Company in full for equipment purchased on March 10. 31 Received $900 in cash from customers for golf services performed.

The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Common Stock, Retained Earnings, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.

Instructions

Journalize the March transactions, including explanations. Bradley's records golf fees as service revenue.

Journalize transactions, post, and prepare a trial balance.

(LO 3, 4, 5), AP

P3-5A Ayala Architects incorporated as licensed architects on April 1, 2017. During the �irst month of the operation of the business, these events and transactions occurred:

Apr. 1 Stockholders invested $18,000 cash in exchange for common stock of the corporation. 1 Hired a secretary-receptionist at a salary of $375 per week, payable monthly.

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2 Paid of�ice rent for the month $900. 3 Purchased architectural supplies on account from Burmingham Company $1,300. 10 Completed blueprints on a carport and billed client $1,900 for services. 11 Received $700 cash advance from M. Jason to design a new home. 20 Received $2,800 cash for services completed and delivered to S. Melvin. 30 Paid secretary-receptionist for the month $1,500. 30 Paid $300 to Burmingham Company for accounts payable due.

The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts Payable, Unearned Service Revenue, Common Stock, Service Revenue, Salaries and Wages Expense, and Rent Expense.

Instructions (a) Journalize the transactions, including explanations.

(b) Post to the ledger T-accounts.

(c) Prepare a trial balance on April 30, 2017.

(a) Cash $18,800 Tot. trial balance $24,400

Journalize transactions, post, and prepare a trial balance.

(LO 3, 4, 5), AP

P3-6A This is the trial balance of Lacey Company on September 30.

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The October transactions were as follows.

Oct. 5 Received $1,300 in cash from customers for accounts receivable due. 10 Billed customers for services performed $5,100. 15 Paid employee salaries $1,200. 17 Performed $600 of services in exchange for cash. 20 Paid $1,900 to creditors for accounts payable due. 29 Paid a $300 cash dividend. 31 Paid utilities $400.

Instructions (a) Prepare a general ledger using T-accounts. Enter the opening balances in the ledger accounts as of

October 1. Provision should be made for these additional accounts: Dividends, Service Revenue, Salaries and Wages Expense, and Utilities Expense. (Hint: The October 1 beginning amounts are the September 30 balances in the trial balance above.)

(b) Journalize the transactions, including explanations.

(c) Post to the ledger accounts.

(d) Prepare a trial balance on October 31, 2017.

(a) Cash $17,300 Tot. trial balance $35,700

Prepare a correct trial balance.

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(LO 5), AN

P3-7A This trial balance of Washburn Co. does not balance.

Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors:

1. Cash received from a customer on account was debited for $780, and Accounts Receivable was credited for the same amount. The actual collection was for $870.

2. The purchase of a printer on account for $340 was recorded as a debit to Supplies for $340 and a credit to Accounts Payable for $340.

3. Services were performed on account for a client for $900. Accounts Receivable was debited for $90 and Service Revenue was credited for $900.

4. A debit posting to Salaries and Wages Expense of $700 was omitted.

5. A payment on account for $206 was credited to Cash for $206 and credited to Accounts Payable for $260.

6. Payment of a $600 cash dividend to Washburn's stockholders was debited to Salaries and Wages Expense for $600 and credited to Cash for $600.

Instructions

Prepare the correct trial balance. (Hint: All accounts have normal balances.)

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Tot. trial balance $16,900

Journalize transactions, post, and prepare a trial balance.

(LO 3, 4, 5), AP

P3-8A The Triquel Theater Inc. was recently formed. It began operations in March 2017. The Triquel is unique in that it will show only triple features of sequential theme movies. On March 1, the ledger of The Triquel showed Cash $16,000, Land $38,000, Buildings (concession stand, projection room, ticket booth, and screen) $22,000, Equipment $16,000, Accounts Payable $12,000, and Common Stock $80,000. During the month of March, the following events and transactions occurred.

Mar. 2 Rented the �irst three Star Wars movies (Star Wars®, The Empire Strikes Back, and The Return of the Jedi) to be shown for the �irst three weeks of March. The �ilm rental was $10,000; $2,000 was paid in cash and $8,000 will be paid on March 10.

3 Ordered the �irst three Star Trek movies to be shown the last 10 days of March. It will cost $500 per night.

9 Received $9,900 cash from admissions. 10 Paid balance due on Star Wars movies' rental and $2,900 on March 1 accounts payable. 11 The Triquel Theater contracted with R. Lazlo to operate the concession stand. Lazlo agrees to

pay The Triquel 15% of gross receipts, payable monthly, for the rental of the concession stand. 12 Paid advertising expenses $500. 20 Received $8,300 cash from customers for admissions. 20 Received the Star Trek movies and paid rental fee of $5,000. 31 Paid salaries of $3,800. 31 Received statement from R. Lazlo showing gross receipts from concessions of $10,000 and the

balance due to The Triquel of $1,500 ($10,000×.15) for March. Lazlo paid half the balance due and will remit the remainder on April 5.

31 Received $20,000 cash from customers for admissions.

In addition to the accounts identi�ied above, the chart of accounts includes Accounts Receivable, Service Revenue, Rent Revenue, Advertising Expense, Rent Expense, and Salaries and Wages Expense.

Instructions (a) Using T-accounts, enter the beginning balances to the ledger.

(b) Journalize the March transactions, including explanations. The Triquel records admission revenue as service revenue, concession revenue as sales revenue, and �ilm rental expense as rent expense.

(c) Post the March journal entries to the ledger.

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(d) Prepare a trial balance on March 31, 2017.

(a) Cash $ 32,750 Tot. trial balance $128,800

Journalize transactions, post, and prepare a trial balance.

(LO 3, 4, 5), AP

P3-9A On July 31, 2017, the general ledger of Hills Legal Services Inc. showed the following balances: Cash $4,000, Accounts Receivable $1,500, Supplies $500, Equipment $5,000, Accounts Payable $4,100, Common Stock $3,500, and Retained Earnings $3,400. During August, the following transactions occurred.

Aug. 3 Collected $1,200 of accounts receivable due from customers. 5 Received $1,300 cash for issuing common stock to new investors. 6 Paid $2,700 cash on accounts payable. 7 Performed legal services of $6,500, of which $3,000 was collected in cash and the remainder

was due on account. 12 Purchased additional equipment for $1,200, paying $400 in cash and the balance on account. 14 Paid salaries $3,500, rent $900, and advertising expenses $275 for the month of August. 18 Collected the balance for the services performed on August 7. 20 Paid cash dividend of $500 to stockholders. 24 Billed a client $1,000 for legal services performed. 26 Received $2,000 from Laurentian Bank; the money was borrowed on a bank note payable that is

due in 6 months. 27 Agreed to perform legal services for a client in September for $4,500. The client will pay the

amount owing after the services have been performed. 28 Received the utility bill for the month of August in the amount of $275; it is not due until

September 15. 31 Paid income tax for the month $500.

Instructions (a) Using T-accounts, enter the beginning balances to the ledger.

(b) Journalize the August transactions.

(c) Post the August journal entries to the ledger.

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(d) Prepare a trial balance on August 31, 2017.

(a) Cash $6,225 Tot. trial balance $20,175

Journalize transactions, post, and prepare trial balance.

(LO 3, 4, 5), AP

P3-10A Pamper Me Salon Inc.'s general ledger at April 30, 2017, included the following: Cash $5,000, Supplies $500, Equipment $24,000, Accounts Payable $2,100, Notes Payable $10,000, Unearned Service Revenue (from gift certi�icates) $1,000, Common Stock $5,000, and Retained Earnings $11,400. The following events and transactions occurred during May.

May 1 Paid rent for the month of May $1,000. 4 Paid $1,100 of the account payable at April 30. 7 Issued gift certi�icates for future services for $1,500 cash. 8 Received $1,200 cash from customers for services performed. 14 Paid $1,200 in salaries to employees. 15 Received $800 in cash from customers for services performed. 15 Customers receiving services worth $700 used gift certi�icates in payment. 21 Paid the remaining accounts payable from April 30. 22 Received $1,000 in cash from customers for services performed. 22 Purchased supplies of $700 on account. All of these were used during the month. 25 Received a bill for advertising for $500. This bill is due on June 13. 25 Received and paid a utilities bill for $400. 29 Received $1,700 in cash from customers for services performed. 29 Customers receiving services worth $600 used gift certi�icates in payment. 31 Interest of $50 was paid on the note payable. 31 Paid $1,200 in salaries to employees. 31 Paid income tax payment for the month $150.

Instructions (a) Using T-accounts, enter the beginning balances in the general ledger as of April 30, 2017.

(b) Journalize the May transactions.

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(c) Post the May journal entries to the general ledger.

(d) Prepare a trial balance on May 31, 2017.

(a) Cash $5,100 Tot. trial balance $34,800

Analyze errors and their effects on the trial balance.

(LO 5), AN

P3-11A The bookkeeper for Roger's Dance Studio made the following errors in journalizing and posting.

1. A credit to Supplies of $600 was omitted.

2. A debit posting of $300 to Accounts Payable was inadvertently debited to Accounts Receivable.

3. A purchase of supplies on account of $450 was debited to Supplies for $540 and credited to Accounts Payable for $540.

4. A credit posting of $680 to Interest Payable was posted twice.

5. A debit posting to Income Taxes Payable for $250 and a credit posting to Cash for $250 were made twice.

6. A debit posting for $1,200 of Dividends was inadvertently posted to Salaries and Wages Expense instead.

7. A credit to Service Revenue for $450 was inadvertently posted as a debit to Service Revenue.

8. A credit to Accounts Receivable of $250 was credited to Accounts Payable.

Instructions

For each error, indicate (a) whether the trial balance will balance, (b) the amount of the difference if the trial balance will not balance, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example.

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PROBLEMS: SET B AND SET C Visit the book's companion website, at www.wiley.com/college/kimmel (http://www.wiley.com/college/kimmel) , and choose the Student Companion site to access Problems: Set B and Set C.

CONTINUING PROBLEM Cookie Creations

(Note: This is a continuation of the Cookie Creations problem from Chapters 1 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch01#ch01) and 2 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch02#ch02) .)

CC3 In November 2017, after having incorporated Cookie Creations Inc., Natalie begins operations. She has decided not to pursue the offer to supply cookies to Biscuits. Instead, the company will focus on offering cooking classes.

Go to the book's companion website, www.wiley.com/college/kimmel (http://www.wiley.com/college/kimmel) , to see the completion of this problem.

EXPAND YOUR | CRITICAL THINKING

FINANCIAL REPORTING PROBLEM: Apple Inc.

E CT3-1 The �inancial statements of Apple Inc. in Appendix A

(http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a01#a01) at the back of this textbook contain the following selected accounts, all in thousands of dollars.

Common Stock $ 23,313 Accounts Payable 30,196 Accounts Receivable 17,460 Selling, General, and Administrative Expenses 11,993 Inventories 2,111 Net Property, Plant, and Equipment 20,624 Net Sales 182,795

Instructions

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(a) What is the increase and decrease side for each account? What is the normal balance for each account?

(b) Identify the probable other account in the transaction and the effect on that account when:

(1) Accounts Receivable is decreased.

(2) Accounts Payable is decreased.

(3) Inventories is increased.

(c) Identify the other account(s) that ordinarily would be involved when:

(1) Interest Expense is increased.

(2) Property, Plant, and Equipment is increased.

COMPARATIVE ANALYSIS PROBLEM: Columbia Sportswear Company vs. VF Corporation

E CT3-2 The �inancial statements of Columbia Sportswear Company are presented in Appendix B

(http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a02#a02) . Financial statements of VF Corporation are presented in Appendix C (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a03#a03) .

Instructions (a) Based on the information contained in these �inancial statements, determine the normal

balance for:

Columbia Sportswear VF (1) Accounts Receivable

(2) Net Property, Plant, and Equipment

(3) Accounts Payable

(4) Retained Earnings

(5) Net Product Sales

(1) Inventories

(2) Provision for Income Taxes

(3) Accrued Liabilities

(4) Common Stock

(5) Interest Expense

(b) Identify the other account ordinarily involved when:

(1) Accounts Receivable is increased.

(2) Notes Payable is decreased.

(3) Equipment is increased.

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(4) Interest Revenue is increased.

COMPARATIVE ANALYSIS PROBLEM: Amazon.com, Inc. vs. Wal-Mart

E CT3-3 Amazon.com, Inc.'s �inancial statements are presented in Appendix D

(http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a02#a02) . Financial statements of Wal-Mart Stores, Inc. are presented in Appendix E (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a05#a05) .

Instructions (a) Based on the information contained in the �inancial statements, determine the normal

balance of the listed accounts for each company.

Amazon Wal-Mart 1. Interest Expense 1. Product Revenues 2. Cash and Cash Equivalents 2. Inventories 3. Accounts Payable 3. Cost of Sales

(b) Identify the other account ordinarily involved when:

(1) Accounts Receivable is increased.

(2) Interest Expense is increased.

(3) Salaries and Wages Payable is decreased.

(4) Service Revenue is increased.

INTERPRETING FINANCIAL STATEMENTS

E CT3-4 Chieftain International, Inc., is an oil and natural gas exploration and production company. A recent balance sheet reported $208 million in assets with only $4.6 million in liabilities, all of which were short-term accounts payable.

During the year, Chieftain expanded its holdings of oil and gas rights, drilled 37 new wells, and invested in expensive 3-D seismic technology. The company generated $19 million cash from operating activities and paid no dividends. It had a cash balance of $102 million at the end of the year.

Instructions (a) Name at least two advantages to Chieftain from having no long-term debt. Can you think of

disadvantages?

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(b) What are some of the advantages to Chieftain from having this large a cash balance? What is a disadvantage?

(c) Why do you suppose Chieftain has the $4.6 million balance in accounts payable, since it appears that it could have made all its purchases for cash?

REAL-WORLD FOCUS

E CT3-5 Purpose: This activity provides information about career opportunities for CPAs.

Address: www.startheregoplaces.com/why-accounting, or go to www.wiley.com/college/kimmel (http://www.wiley.com/college/kimmel)

Instructions

Go the address shown above and then answer the following questions.

(a) Where do CPAs work?

(b) What skills does a CPA need?

(c) What is the salary range for a CPA at a large �irm during the �irst three years? What is the salary range for chief �inancial of�icers and treasurers at large corporations?

S CT3-6 The January 27, 2011, edition of the New York Times contains an article by Richard Sandomir entitled “N.F.L. Finances, as Seen Through Packers' Records.” The article discusses the fact that the Green Bay Packers are the only NFL team that publicly publishes its annual report.

Instructions

Read the article and answer the following questions.

(a) Why are the Green Bay Packers the only professional football team to publish and distribute an annual report?

(b) Why is the football players' labor union particularly interested in the Packers' annual report?

(c) In addition to the players' labor union, what other outside party might be interested in the annual report?

(d) Even though the Packers' revenue increased in recent years, the company's operating pro�it fell signi�icantly. How does the article explain this decline?

DECISION-MAKING ACROSS THE ORGANIZATION

E CT3-7 Saira Morrow operates Dressage Riding Academy, Inc. The academy's primary sources of revenue are riding fees and lesson fees, which are provided on a cash basis. Saira also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains these accounts:

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Cash, Accounts Receivable, Unearned Service Revenue, and Service Revenue.

The academy owns 10 horses, a stable, a riding corral, riding equipment, and of�ice equipment. These assets are accounted for in the following accounts: Horses, Buildings, and Equipment.

The academy employs stable helpers and an of�ice employee, who receive weekly salaries. At the end of each month, the mail usually brings bills for advertising, utilities, and veterinary service. Other expenses include feed for the horses and insurance. For its expenses, the academy maintains the following accounts: Supplies, Prepaid Insurance, Accounts Payable, Salaries and Wages Expense, Advertising Expense, Utilities Expense, Maintenance and Repairs Expense, Supplies Expense, and Insurance Expense.

Saira's sole source of personal income is dividends from the academy. Thus, the corporation declares and pays periodic dividends. To account for stockholders' equity in the business and dividends, two accounts are maintained: Common Stock and Dividends.

During the �irst month of operations, an inexperienced bookkeeper was employed. Saira asks you to review the following eight entries of the 50 entries made during the month. In each case, the explanation for the entry is correct.

Instructions

With the class divided into groups, answer the following.

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(a) For each journal entry that is correct, so state. For each journal entry that is incorrect, prepare the entry that should have been made by the bookkeeper.

(b) Which of the incorrect entries would prevent the trial balance from balancing?

(c) What was the correct net income for May, assuming the bookkeeper originally reported net income of $4,500 after posting all 50 entries?

(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balance of $12,475 after posting all 50 entries?

COMMUNICATION ACTIVITY

S CT3-8 Klean Sweep Company offers home cleaning service. Two recurring transactions for the company are billing customers for services performed and paying employee salaries. For example, on March 15 bills totaling $6,000 were sent to customers, and $2,000 was paid in salaries to employees.

Instructions

Write a memorandum to your instructor that explains and illustrates the steps in the recording process for each of the March 15 transactions. Use the format illustrated in the textbook under the heading “The Recording Process Illustrated” (pp. 111–116).

ETHICS CASE

E CT3-9 Vanessa Jones is the assistant chief accountant at IBT Company, a manufacturer of computer chips and cellular phones. The company presently has total sales of $20 million. It is the end of the �irst quarter and Vanessa is hurriedly trying to prepare a trial balance so that quarterly �inancial statements can be prepared and released to management and the regulatory agencies. The total credits on the trial balance exceed the debits by $1,000.

In order to meet the 4 p.m. deadline, Vanessa decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chose Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Vanessa plugs the difference! She believes that the difference is quite small and will not affect anyone's decisions. She wishes that she had another few days to �ind the error but realizes that the �inancial statements are already late.

Instructions (a) Who are the stakeholders in this situation?

(b) What ethical issues are involved?

(c) What are Vanessa's alternatives?

E CT3-10 The July 28, 2007, issue of the Wall Street Journal includes an article by Kathryn Kranhold entitled “GE's Accounting Draws Fresh Focus on News of Improper Sales Bookings.”

Instructions

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Read the article and answer the following questions.

(a) What improper activity did the employees at GE engage in?

(b) Why might the employees have engaged in this activity?

(c) What were the implications for the employees who engaged in this activity?

(d) What does it mean to “restate” �inancial results? Why didn't GE restate its results to correct for the improperly reported locomotive sales?

ALL ABOUT YOU

E CT3-11 In their annual reports to stockholders, companies must report or disclose information about all liabilities, including potential liabilities related to environmental clean- up. There are many situations in which you will be asked to provide personal �inancial information about your assets, liabilities, revenues, and expenses. Sometimes you will face dif�icult decisions regarding what to disclose and how to disclose it.

Instructions

Suppose that you are putting together a loan application to purchase a home. Based on your income and assets, you qualify for the mortgage loan, but just barely. How would you address each of the following situations in reporting your �inancial position for the loan application? Provide responses for each of the following questions.

(a) You signed a guarantee for a bank loan that a friend took out for $20,000. If your friend doesn't pay, you will have to pay. Your friend has made all of the payments so far, and it appears he will be able to pay in the future.

(b) You were involved in an auto accident in which you were at fault. There is the possibility that you may have to pay as much as $50,000 as part of a settlement. The issue will not be resolved before the bank processes your mortgage request.

(c) The company at which you work isn't doing very well, and it has recently laid off employees. You are still employed, but it is quite possible that you will lose your job in the next few months.

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LEARNING OBJECTIVE 6

Compare the procedures for the recording process under GAAP and IFRS. 

International companies use the same set of procedures and records to keep track of transaction data. Thus, the material in Chapter 3 (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/ch03#ch03) dealing with the account, general rules of debit and credit, and steps in the recording process—the journal, ledger, and chart of accounts—is the same under both GAAP and IFRS.

KEY POINTS

Following are the key similarities and differences between GAAP and IFRS as related to the recording process.

Similarities

Transaction analysis is the same under IFRS and GAAP.

Both the IASB and the FASB go beyond the basic de�initions provided in the textbook for the key elements of �inancial statements, that is assets, liabilities, equity, revenues, and expenses. The implications of the expanded de�initions are discussed in more advanced accounting courses.

As shown in the textbook, dollar signs are typically used only in the trial balance and the �inancial statements. The same practice is followed under IFRS, using the currency of the country where the reporting company is headquartered.

A trial balance under IFRS follows the same format as shown in the textbook.

Differences

IFRS relies less on historical cost and more on fair value than do FASB standards.

Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. While most public U.S. companies have these systems in place, many non-U.S. companies have never completely documented the controls nor had an independent auditor attest to their effectiveness.

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LOOKING TO THE FUTURE

The basic recording process shown in this textbook is followed by companies around the globe. It is unlikely to change in the future. The de�initional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.

IFRS Practice IFRS SELF-TEST QUESTIONS

1. Which statement is correct regarding IFRS? (a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on

the left.

(b) IFRS uses the same process for recording transactions as GAAP.

(c) The chart of accounts under IFRS is different because revenues follow assets.

(d) None of the above statements are correct.

2. The expanded accounting equation under IFRS is as follows: (a) Assets=Liabilities+Common Stock+Retained Earnings+Revenues−Expenses+Dividends.

(b) Assets+Liabilities=Common Stock+Retained Earnings+Revenues−Expenses−Dividends.

(c) Assets=Liabilities+Common Stock+Retained Earnings+Revenues−Expenses−Dividends.

(d) Assets=Liabilities+Common Stock+Retained Earnings−Revenues−Expenses−Dividends.

3. A trial balance: (a) is the same under IFRS and GAAP.

(b) proves that transactions are recorded correctly.

(c) proves that all transactions have been recorded.

(d) will not balance if a correct journal entry is posted twice.

4. One difference between IFRS and GAAP is that: (a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting.

(b) IFRS uses a different posting process than GAAP.

(c) IFRS uses more fair value measurements than GAAP.

(d) the limitations of a trial balance are different between IFRS and GAAP.

5. The general policy for using proper currency signs (dollar, yen, pound, etc.) is the same for both IFRS and this textbook. This policy is as follows: (a) Currency signs only appear in ledgers and journal entries.

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(b) Currency signs are only shown in the trial balance.

(c) Currency signs are shown for all compound journal entries.

(d) Currency signs are shown in trial balances and �inancial statements.

INTERNATIONAL FINANCIAL REPORTING PROBLEM: Louis Vuitton

IFRS3-1 The �inancial statements of Louis Vuitton are presented in Appendix F (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a06#a06) . Instructions for accessing and using the company's complete annual report, including the notes to its �inancial statements, are also provided in Appendix F (http://content.thuzelearning.com/books/Kimmel.2745.17.1/sections/a06#a06) .

Instructions

Describe in which statement each of the following items is reported, and the position in the statement (e.g., current asset).

(a) Other operating income and expense.

(b) Cash and cash equivalents.

(c) Trade accounts payable.

(d) Cost of net �inancial debt.

Answers to IFRS Self-Test Questions

1. b 2. c 3. a 4. c d. d